Broadly the new rules mean that when a private company enters into contracts, or makes payments to off-payroll workers/contractors via a PSC they will need to check the individual’s “deemed employment” tax status, and depending on the results may have to treat them as employees and deduct income tax and NIC (as well as pay employer’s NIC).
The rules only apply where the company receiving the individual’s services are “medium sized” or “large”. Businesses which are classed as “small” are therefore exempt from applying the new rules.
The definition of a “small” company is one where two (or more) of the following apply:
If a company is small, but is part of a larger group, then they need to consider the group’s position as a whole to determine whether they meet the definition of “small”.
For small businesses engaging with individuals via a PSC, the rules remain as they were before – the PSC has to assess their own IR35 position, and it is the PSC that is liable for income tax and NIC. However it should be noted that a small company can still be responsible in certain circumstances, particularly if the company’s contract is with the individual personally but the individual instructs the company to pay the PSC for the services.
Where a large or medium sized company engages with an individual who is trading through a PSC and they are deemed to be caught by the off-payroll rules, then the party paying the PSC will be treated as an employer and be required to deduct income tax and NIC (both employee’s and employer’s) and report to HMRC under real time information (RTI).
If you are a large or medium company, under the new rule you will have to:
There are many factors that need to be consider when making a status determination.
HMRC have a useful status determination tool “Check Employment Status for Tax” (CEST) which allows companies to input specific details on contractors they are using to determine the IR35 status.
Whilst HMRC accept that companies can rely on outcomes from the CEST tool (providing all the facts recorder are accurate), often the decision from the CEST tool states that the status is undetermined, which means the company then needs to explore the position further to determine whether the contractor is caught by the rules or not.
When this happens, we as tax experts, can assist in reviewing the status of contractors and advise on the steps required following the outcome.
Once a determination is made, the company is required to share it with all of the supply chain and the worker, and records should be kept detailing each determination and how it was reached.
Although it is the company engaging with the PSC that needs to determine the employment status under the rules, the individual or the end user may not always agree with the determination.
The new rules require that a company engaging with a PSC and caught within the IR35 rules, must provide a status determination statement that outlines the IR35 status decision to both the contractor and any other party that is directly engaging the contractor (typically an agent or intermediary). Until the status determination is provided to the contractor the end user remains responsible for collecting income tax and NIC.
If the contractor disagrees with the IR35 status decision, there is a special “client-led disagreement process” which requires the end user to review the decision and provide a response within 45 days as to why they came to the conclusion. If the deadline isn’t met, the IR35 liability falls to the end user.
This means that the end user (the one dealing directly with the contractor day-to-day) has a duty to ensure they take a reasoned approach at determining the status, as if they cannot provide support of their thought process under the client-led disagreement process, the responsibility to deduct tax and NIC transfers to them (rather than the fee payer).
From a worker’s perspective, if they are providing services to either a public sector client or a medium or large sized private sector client they should get an employment status determination from the client, as well as the reasons behind that determination – this then allows them to dispute the determination if they disagree with it.
Obviously the new rules are complex, and whilst HMRC have indicated that they will take a soft approach when genuine mistakes have been made, they could still charge penalties for failing to comply with the new rules. If you think the new rules could apply to you, or need assistance in determining a worker’s status, please get in touch and we can review the position.
Article by Clare Lancaster, Senior Tax Manager
Contact our Tax Team on 01292 265071.