IR35 PRIVATE SECTOR REFORM
(IR35 updates 2020 – OFF-PAYROLL WORKING)
The UK’s IR35 legislation ensures that contractors pay the same Tax and National Insurance contributions as an equivalent employee. New IR35 changes will be implemented in April 2020 for private sector contractors. The large and medium companies will assess IR35 on their contractors. The 2020 reform will bring private sector IR35 in line with the public sector, where the reform was implemented in 2017.
The Reason for IR35 change
The IR35 rules were originally introduced in the UK in 2000, with the intention of ensuring that individuals who are working like employees but who operate via an intermediary, such as a personal service company (PSC), pay broadly the same tax and National Insurance Contributions (NIC) as an employee would. IR35 rules have, however, been largely ineffective as the PSC has had to ‘self-assess’ whether the rules apply. Consequently, HMRC estimate that there is widespread non-compliance which they have been unable to effectively tackle.
The reform will place the responsibility for assessing whether IR35 applies onto the private sector contractors to medium and large businesses from 6 April 2020. If the assessments are within IR35 legislation, the businesses or the intermediary will become responsible for accounting for and paying the related tax and NIC, including the additional cost of employer’s NIC, to HMRC.
The medium and large businesses will be responsible for carrying out an assessment to determine whether Limited Company contractors’ roles are inside or outside IR35 legislation. If the contractor’s role is deemed to be inside legislation, you will be subject to PAYE and NICs deductions.
Exclusion for Small businesses
The new rules will only apply to medium and large businesses in the private sector and intermediary, such as your personal service company (PSC) and fee payers in the recruitment sector.
To qualify as a small company, a company that is not otherwise ineligible must meet at least two of these three qualifying conditions:
- turnover of £10.2m or less;
- £5.1m or less on its balance sheet; or
- 50 employees or less.
Before 6 April 2020 it Is your limited company’s responsibility to decide your own employment status for each assignment. From 6 April 2020 onwards, all public sector authorities and medium and large-sized private sector businesses will be responsible for determining whether the rules apply – i.e. are you “inside IR35” or “outside IR35”? Where the private sector client is considered “small”, your limited company will remain responsible for deciding the contractor’s employment status and whether IR35 applies.
IR35 updates 2020 impact for Contractors (Private Sector)
- The responsibilities for determination in/out IR35 are shifted from personal service companies to intermediaries or medium and large businesses. The contractors need to be involved into your clients’ determination process, knowing your employment rights and obligations in the determination process. Even if the end client is deemed a Small Business, if there is an intermediary in place, such as a national recruitment agency, then you may still be affected.
- Those workers who fall inside of IR35 will be required to have PAYE and National Insurance Contributions (NICs) deducted at source from their income. The ‘fee-payer’ (usually the agency or end client depending on the contractual chain) will be responsible for deducting the relevant tax and NICs on behalf of the worker, prior to paying the PSC’s fee.
- If the contractor/personal service company is paid through intermediary, eg. recruitments agency, the recruitment agencies cannot lawfully deduct secondary NICs from an agreed fee, but recruitment businesses may adjust the contractor’s pay rate to factor in the additional costs of supply which include employers’ NICs. Depending on your contractual terms, there may be scope for the rate to be negotiated accordingly.
- The IR35 change in 2020 means that tax and national insurance will be applied resulting in a significant drop in the contractor’s net take home pay.
- It is likely the contractors will negotiate a higher rate, to compensate the reduction in net take home pay.
- It is likely your end client would consider offering you a PAYE contract instead (the benefit of this includes paid holiday pay, sick pay, maternity / paternity pay, pension contributions and other employment rights).
- Maybe it is time to review your industry sector to seek new contract opportunities with a ‘Small Business”.
you can check your status to reconfirm if you fall under IR35 rules by clicking the link below;
https://www.tax.service.gov.uk/check-employment-status-for-tax/disclaimer
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