Yesterday (July 11th) saw HMRC release the much anticipated draft legislation for the April 2020* Off-Payroll (IR35) legislation reforms. Following the recently closed consultation, there had been hope that concerns raised by industry bodies would be addressed, however they seem to have been mostly ignored.
But, what exactly has the draft legislation told us about what will be unveiled during the 2019-20 Finance Bill later this year? To be honest, not much more than we already knew…
IR35 not to be applied retrospectively
Within the draft legislation, HMRC have confirmed that they will not be applying the rules retrospectively following the reforms. Any individuals who begin paying employment taxes after April 2020* will not be targeted to repay any employment taxes for previous years.
Small companies still exempt
In an attempt to minimise the administrative burden of IR35, small companies - as defined in the Companies Act 2006 - will be exempt from the reforms. This means that the current off-payroll rules will continue to apply to small companies within the private sector.
Removal of the 5% allowance
Currently, for any PSC (Personal Service Company) that continues to work a contract which falls inside IR35 there is a 5% tax allowance intended to compensate the PSC to reflect the costs of administering the IR35 legislation. As this will no longer be the responsibility of the PSC following April 2020*, the allowance will be removed. This will mean that 100% of contract income will be subject to employment taxes.
As above, where the responsibility of administering IR35 still falls with the PSC (for contracts within small companies), the 5% allowance will still apply.
PAYE tax and NI deductions will be made at source by the ‘fee payer’
If the client determines the engagement as inside IR35, the amounts paid to the workers intermediary for the workers services is to be treated as employment income. As with the public sector rules the fee payer will be responsible for deducting PAYE tax and NI and paying this to HMRC.
Introduction of a Status Determination Statement (SDS)
The reforms to the legislation will see a Status Determination Statement (SDS) introduced. This will be a document to confirm the IR35 status of a contract and the reason for that decision. It must be provided to the worker and the fee payer. The SDS is only valid if the client has taken reasonable care to arrive at their status decision.
The client will have ‘fee payer responsibilities’ until they pass the SDS to the worker and the party they contract with, this means that they will be responsible for any tax liability. The last party in the supply chain to receive the determination is classified as the fee payer and will take fee payer responsibilities.
Statutory client-led disagreement process to be introduced
The legislation outlines a client-led status disagreement process, this will also apply to public sector engagements from April 2020*. This means that if the worker or the fee payer disagrees with the Status Determination Statement (SDS) they can make representations to the client. The client must respond in 45 days to inform the worker or feepayer that either the decision stands and give the reasons why it has reached that decision or give the worker and the deemed employer a revised SDS.
Debt transfer provisions
The draft legislation introduces a new power for HMRC to collect unpaid PAYE from other parties in the supply chain. This will also apply in the public sector from April 2020*.
This will mean that if the fee payer fails to make deductions and pay the correct PAYE tax and National Insurance liability, HMRC can recover the unpaid liability from another organisation in the supply chain.
Improvements to CEST
Following a number of complaints and concerns raised about the Government’s CEST (Check Employment Status for Tax) Tool, HMRC have confirmed that they will be making improvements to the tool. These improvements should be made available later in 2019.
How can Parasol help?
Whilst IR35 does not and will not affect those working as an umbrella employee, we understand that as a contractor you may want to stay informed of industry updates. If you have any concerns regarding a change in your contract or circumstances, our support team are always happy to help.
For recruiters, if you have any queries or concerns regarding the IR35 legislation or the upcoming reforms, the team at Parasol are more than happy to help. Whether you have a contractor in need of advice or you’d like to improve your knowledge of the legislation with an IR35 training session, please let us know how we can support you.
Speak to your account manager or visit our recruiter page for more information.
* Update: at the time this article was written, the off-payroll (IR35) reforms were due to be implemented on the 6th April 2020. On the 17th March 2020, the UK government announced that it would be deferring the reforms to the 6th April 2021 to help businesses and individuals during the COVID-19 crisis.