Employment law: Changes to Off Payroll Working Rules (IR35)

Specialist employment lawyer, David Dixey, discusses the changes to off payroll working rules (IR35), an important change for many employers, but particularly those within the construction industry.

Businesses that regularly use contractors working through a Personal Service Company (PSC) intermediary should be familiar with IR35 legislation that permits HMRC to tax contractors who work through such an arrangement as if they were in effect employees of the end client.

Several years ago, the rules were changed placing the onus on public sector organisations to check the proper tax status of contractors retained within the organisation and tax them appropriately. Prior to this the onus was on the contractor to make this decision.

From 6^th April 2020 the rules applicable to the public sector will be extended to some businesses within the private sector, namely medium or large sized non-public sector businesses and organisations, which are now responsible for determining the tax status of contractors.

Truly self-employed individuals will continue to be responsible for their own tax arrangements; the rule changes are intended to apply to contractors who, but for their PSC intermediary would, on a day to day basis, be indistinguishable from employees of the organisation. Contractors who tend to work for one client, attend the same premises daily and follow the client’s rules and procedures are likely to be taxed in accordance with IR35.

The rules are not changing for those contractors providing services to small businesses, which are defined as businesses meeting two or more of the following conditions:

1.         An annual turnover of not more than £10.2million;
2.         A balance sheet total of not more than £5.1million;
3.         Not more than 50 employees.

In respect of small businesses meeting the above criteria, the onus will remain with the contractor to decide their tax status.Businesses that are classed as “medium or large sized organisations” will need to ensure full understanding of the rule changes to avoid potential investigation by HRMC. In recognising that the rule change may create difficulties and administrative burden for businesses, the government has indicated that: 

1.         Businesses will not have to pay penalties for inaccuracies in the first year, except in cases of deliberate non-compliance;
2.         Detailed guidance will be published by HMRC;
3.         HMRC will increase awareness by producing webinars etc;
4.         New information received from the changes will not be used to open investigations into Personal Service Companies in respect of past tax years, unless fraud or criminal behaviour is suspected.