IR35 reforms 2020: What is changing and how can you reduce the risks?

The IR35 reforms will be implemented this April—do you feel prepared? Do you know how to mitigate the risks if you’re a medium-sized or large-sized company hiring contractors and freelancers? Do you know where you need to go to get the information you’re missing?

This article aims to give you a quick overview of what's coming and how it will affect you.

You may also want to see our article covering the questions asked at our IR35 events, and the answers from our experts: IR35 reforms 2020: 16 questions asked at LexisNexis events and the answers from industry experts

The basics

The current IR35 legislation in the UK stipulates that contractors pay equal tax and National Insurance contributions (NICs) to that of a regular employee.

The new IR35 rules will be implemented in April 2020 for private sector contractors. The changes will mean that medium and large companies will be liable for assessing a contractor’s employment status relating to IR35—a responsibility which previously sat with the contractors themselves.

The 2020 reform will bring those operating in the public sector in line with public sector laws, where the reform was implemented in 2017.

The detail: What is changing?

HMRC has published two draft Regulations that explain how it will recover unpaid income tax and NICs from April 2020, when the new IR35 rules come into effect.

The new rules will make medium to large employers in the private sector and who engage contractors via intermediaries (the clients), potentially liable for income tax and NICs that should have been paid on the contractor’s earnings by other parties who are further down in the supply chain.

The draft regulations confirm that HMRC will first seek to recover any unpaid tax and NIC liabilities from the agency the client contracts with, where this agency is UK-based (agency one in the labour supply chain). Where HMRC are of the view that there is no realistic prospect of recovering the outstanding Income Tax or NICs from agency one, HMRC will then seek to recover unpaid liabilities from the client. HMRC will issue a recovery note to transfer the debt and there will be a right to appeal.

HMRC have issued a technical note to accompany the draft regulations. The note states that HMRC will not transfer the debt in the case of ‘genuine business failure’ of the party ordinarily liable to pay income tax and NICs, but it does not explain what constitutes a ‘genuine business failure’.

The consultation on the draft regulations closes on 19 February 2020.

(Radius Law: http://radiuslaw.co.uk/blog/2020/1/26/ir35-news)

IR35 vs Off-Payroll Working: What’s the difference?

At our recent Breakfast Briefing event on IR35, our partner Haines Watts, provided the following cheat sheet to outline the differences between these two terms:

If you work in the public sector, you may also want to view LexisNexis’ Practice Note:

IR35—off-payroll workers in the public sector

Employee, worker or self-employed?

In employment law, a person’s employment status helps determine:

• their rights
• their employer’s responsibilities

However, a person may have a different employment status in tax law.

At our recent In-house event, Sandra Martins of Radius Law, gave the following simple overview to differentiate a worker’s status in relation to IR35:

When defining employment status of an individual, generally speaking, someone is self-employed if:

• They are in business for themselves, are responsible for the success or failure of their business and can make a loss or a profit
• They can decide what work they do and when, where or how to do it
• They are responsible for fixing any unsatisfactory work in their own time
• They agreed a fixed price for their work - it doesn’t depend on how long the job takes to finish.
• They use their own money to buy business assets, cover running costs, and provide tools and equipment for their work
• They can work for more than one client

Overall, probably the most important factor is Control of the Individual and the work—as above, who is responsible for the individual, their workload, their assets. However…

Don’t assume - always check!

For more information, you may want to use this guide to check employment status for tax: HMRC: Check employment status for tax

Also, see HMRC’s quick overview on types of employment status and employment rights.

Last points to consider:

• For each engagement, a copy of the assessment should be kept on file
• If Self Employed, payments are made Gross to the Worker, otherwise, the Individual should be set up on Payroll and Tax / NIC should be deducted
• There are special rules for businesses supplying Workers, i.e. Employment Agencies

For further reading, see these LexisNexis recent Practice Notes:

The intermediaries legislation—IR35

IR35—practical considerations for the end client

IR35—practical considerations for personal service companies

IR35—key difficulties and HMRC's approach

Not a subscriber to Lexis®PSL?  For a free trial click here.