The Finance Act 2019 sets out changes to be made to the intermediaries legislation (commonly referred to as “IR35”). The main change is that from April 2020, medium and large organisations outside the public sector will need to decide whether the off-payroll rules apply to anyone providing services via an intermediary, and deduct tax and NICs where this is the case.

Reason for the changes

Since April 2017, where the services of an individual are provided through an intermediary to a “public authority”, that public authority has been required to determine the employment status of the individual, and to deduct tax and NICs from payments made to anyone who would be classed as an employee had they not worked via an intermediary. As from April 2020, the same requirements will apply to medium and large private sector bodies. This will bring medium and large non-public sector organisations in line with public sector bodies.

What is IR35

IR35 was introduced in 2000 to ensure that individuals who work off-payroll through their own company (or other intermediary as defined in legislation), who would have been taxed as employees had they been paid directly, pay employment taxes on their income.

Effect of the new rules

Under the new rules, where the client receiving the individual’s services is a medium or large organisation outside of the public sector, responsibility for determining whether IR35 applies will move from the intermediary to that organisation or, if there are agencies or third parties in the contractual chain, to the party closest to the intermediary in that chain. In addition, where the legislation applies, responsibility for operating PAYE and accounting for income tax and national insurance will fall on the organisation (or relevant third party).

Does it affect my organisation?

The legislation is being extended to apply not only to public sector bodies but also to organisations which meet two or more of the following conditions:

  • you have an annual turnover of more than £10.2 million
  • you have a balance sheet total of more than £5.1 million
  • you have more than 50 employees

This is in line with the small companies’ regime, and will include private healthcare providers, community interest companies and charities if they meet these conditions.

Impact

The new legislation is likely to have a significant impact on medium and large organisations outside of the public sector. Like public sector bodies, they will now also need to have systems in place for checking the status of any off-payroll engagements. Public sector bodies are required to continue complying with the legislation and are largely unaffected by the changes. However we are expecting new checks and processes to be developed by HMRC shortly which should assist both public and private sector bodies.

HMRC has already developed the Check Employment Status for Tax (CEST) service to help organisations determine whether the off-payroll working rules apply. HMRC is working with stakeholders to enhance CEST and develop new guidance before the reform comes into effect.

The Government has also indicated that it will introduce a statutory, client-led status disagreement process to allow individuals and fee-payers to challenge the organisation’s determinations. Where organisations fail to comply with the new rules they may be liable to interest and penalties from HMRC.

When do the new rules take effect?

The new rules will apply to payments made on or after 6 April 2020.

How can Capsticks help?

We are offering a menu of services to support private sector employers in meeting the challenge of the new IR35 rules. These include:

  • An audit of existing intermediary contracts to determine whether they are “in scope” for the new rules;
  • Training for your HR and Payroll teams on the requirements of IR35;
  • Template clauses to include in your agreements with agencies in order to discharge your notification obligations and protect your organisation from potential liabilities; and
  • Template letters to go to workers covered by the new IR35 rules.

For more information or to discuss the support that will be most suitable for your organisation please contact Laura Horovitz, Raj Basi, or Andrew Uttley.