TT282: IR35 changes extended into the private sector

November 19, 2018

Of the many announcements in the Chancellor’s recent Budget, one which is bound to concern private sectors businesses is the extension of the IR35 “off payroll” rules (where the IR35 status of the worker is determined by the engaging entity and not the worker) into the private sector from April 2020.

Such rules were first rolled out to public sector organisations in April 2017, and this extension may well prove to be the single largest revenue raising measure of Budget 2018.

Small companies exempt from the changes

The rule change will only impact large and medium-sized businesses, with small companies (estimated to make up 95% of the UK’s businesses) being exempt from the changes.

It is still uncertain how “small” will be defined, but it is likely to be consistent with the Companies Act 2006 definition of those businesses with two of (i) fewer than 50 employees (ii) a turnover of less than £10.2 million, and (iii) total assets of £5.2 million or less, being exempt from the new rules.

What to consider

Even with a delay in implementation, the changes will have a significant impact on businesses engaging with contractors through so-called personal service companies. From managing risk to the costs of engaging with contractors, this will be a major compliance exercise.

In practice, impacted businesses may be discouraged from employing people through personal service companies if they perceive there to be a risk. With businesses, rather than workers, now responsible for checking a contractors’ status, they will be the ones liable for paying fines if they get it wrong.

Businesses will also need to be increasingly stringent with employment checks as incorrectly identifying people as an employee, a worker, or self-employed, could have significant financial implications for that business.

Where a business decides that IR35 does apply, the freelancer’s business will be taxed at source, through the Real Time Information (“RTI”) system, exactly as if it were an employee. Impacted businesses may also insist that contractors move on to the company payroll, with all the costs implications that will create, including Employers’ NIC and the Apprenticeship Levy.

And at a more holistic level, businesses will fundamentally have to reassess the future structure of their off payroll suppliers of services.

Going forward

A further consultation should be expected on the detailed operation of the reform, and this consultation will inform the draft Finance Bill 2019-2020 which is expected to be published in 2019.

If you are concerned about how the tax status of service suppliers to your business might affect you, or for further guidance in this area, please don’t hesitate to speak to your relationship partner at Barnes Roffe.

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