In line with the growth in the gig economy, we are seeing more and more businesses engaging the services of self-employed consultants whether that be to help them complete one off projects, to allow them to tap in to specialist skills or to deal with a surge in work. Whatever the reason, consultants are in high demand.
Seemingly attune to this the Government has announced changes to the tax rules that apply to consultants who provide their services through an intermediary, commonly known as the IR35 rules. In this piece we discuss the current IR35 rules and the new off-payroll working rules that will come in to effect in April 2020.
IR35
The IR35 rules were introduced back in April 2000 and were designed to deal with perceived tax avoidance from consultants providing their services through intermediaries. Commonly, these intermediaries take the form of personal service companies (“PSC”). Under IR35 it is the responsibility of the PSC to determine the consultant’s deemed employment status (i.e. self-employed or employed) and to account to HMRC for PAYE and employer NICs where appropriate.
Despite the introduction of IR35 the Government remains concerned about non-compliance. According to the Government only 10% of PSCs are correctly applying the IR35 rules. To address this and increase compliance the Government is introducing the off-payroll working rules which will come in to force on 6th April 2020.
Off-payroll working rules
The new rules will shift responsibility for establishing a consultant’s deemed employment status to the end client i.e. the organisations that engage the PSC’s services.
Who will they apply to?
The off-payroll working rules will apply to medium and large-sized organisations, limited liability partnerships (LLPs) and unincorporated organisations that meet 2 or more of the following conditions:
- have an annual turnover of more than £10.2 million
- have a balance sheet total of more than £5.1 million
- have more than 50 employees
What will you need to if you are caught by the rules?
If your business is a large or medium sized business that engages consultants through intermediaries there are a number of steps you will need to take once the new rules kick in.
- Assess each consultant’s deemed employment status. This involves a consideration of a number of different factors including the following:
- Personal service – must the individual provide the services themselves?
- Mutuality of obligations – is the end user obliged to provide work and is the worker obliged to accept work?
- Right of substitution – can the individuals send someone else in their place & have they ever sent anyone else?
- Control – how much supervision, direction and control does the end user exercise over the individual?
- Financial risk – does the individual risk their own money?
HMRC has an online tool, CEST, which businesses can use to find out if someone should be classed as self-employed or employed for tax purposes. It comes with a health warning however as the decision relies on the accuracy and honesty of responses given and as such can be easily manipulated to give the desired outcome.
- If you establish that the rules do apply to one or more consultants you should notify them and give them the opportunity to challenge the decision.
- Keep detailed records of your employment status determinations including the reasons and any challenge to your decisions.
- Assuming you still determine that the rules apply you will need to deduct income tax and employee NICs contributions from the consultancy fee and pay appropriate employer NICs. You will need to account to HMRC. Slightly different arrangements will apply if the consultant’s PSC is paid via an agency.
What should you do now?
Whilst the off-payroll working rules will only apply to medium and large sized organisation, HMRC has a clear agenda to tackle what it perceives to be widespread tax avoidance in this area. As such we would encourage businesses of all sizes to take proactive steps now to look at the way they engage consultants through intermediaries to avoid any unwelcome HRMC investigations. To this end we have set out below some steps we suggest businesses take now to ensure compliance and to minimise risk.
- Review your current arrangements with consultants supplied through intermediaries and identify any potential risk areas.
- Those classed as high risk will need to be addressed without delay which may involve ending the consultancy arrangements and employing those individuals. This brings potential risks of its own so you should consider getting advice before taking any of these steps.
- Review and if necessary amend the terms of any consultancy agreements to minimise the risk of the consultants being deemed employees. Alongside this look at your working practices and consider making practical changes to the way the consultants work within your organisation.
