With effect from 6th April 2020, HMRC reforms of IR35, which already apply for the public sector, are being extended to apply to the private sector.
These reforms will apply to any business that engages private service companies.
The first challenge therefore is to establish:
- If the reforms apply to your business; and
- If they do, which private service companies (PSCs) you engage and on what terms.
Will the IR35 reforms apply to you?
No, if you are a small company, as defined in the Companies Act, you are exempt. To be a regarded as a small company, two or more of the following criteria have to apply to you:
- an annual turnover of not more than £10.2 million;
- a balance sheet total of not more than £5.1 million; or
- 50 or less employees.
If you do not fall within this definition of a small company, the reforms will apply to you.
If yes, which PSCs do you engage?
There are two types of PSCs arrangements:
- Three party chain between you as the client – PSC – individual. In that situation you, as the client, are the fee payer to the PSC.
- Four party chain between you as the client – agency – PSC – individual. In this situation it is the agency that is the fee payer to the PSC.
What are the IR35 reforms?
Currently the obligation to deduct Pay As You Earn (PAYE) income tax and make National Insurance contributions (NICs) is with the PSC.
The new regulations oblige you, as the client, to establish whether or not IR35 applies and shifts the burden for doing this away from the PSC. If you determine that IR35 does apply, then the fee payer (being you in a three party chain or the agency in a four party chain) is obliged to deduct Pay As You Earn (PAYE) income tax and make National Insurance contributions (NICs).
The burden of risk of non-compliance and enforcement by HMRC is being shifted from the PSC to the fee payer. If you use the services of a number of PSCs and are not deducting PAYE, you could find that all of your PSC arrangements are the subject of one big HMRC investigation into your business practices.
What steps should you take now?
As soon as possible you should start to audit your existing contractual arrangements and to consider how you will manage the reforms.
It might be helpful in the event that your audit shows that the PSCs are on varying terms, to get them all onto standardised terms so that administration is easier in the future.
Alternatively you might wish to ensure that all PSCs are engaged through an agency rather than directly so that you are no longer the fee payer to the PSC. However, this does not exonerate you from the ultimate responsibility of being the end user client and you will still need to check all the way down the chain to establish whether or not IR35 applies. If it does, you will need to ensure that the agency is deducting PAYE.
You may decide that after April 2020, you do not wish to take the risk of engaging PSCs at all or will, as the case has been in the public sector, assume that IR35 does apply and deduct PAYE. This will, of course, not go down well with individuals who currently enjoy receiving payments via a PSC without deduction and could be disruptive to your business if not planned carefully in advance.
Can I argue that IR35 does not apply?
If you are going to maintain the position that IR35 does not apply to your PSCs because they are already in place and it has not applied in the past, don’t be fooled. Just because IR35 has not been applied in the past, for whatever reason, that does not necessarily mean that it did not apply.
If you want to argue this, it is now the time to start gathering evidence. For example: is there evidence of actual substitution of the individual who provides the services or is it clear that they always work independently without any supervision.
There is a lack of current case law to be able to give definitive advice on the application of IR35 in the private sector so even if you have gathered the evidence it may not be sufficient to successfully argue that IR35 does not apply.
This is a far reaching reform and should be planned for and not be ignored. When similar reforms were introduced to the public sector, it resulted in a shift in the manner in which contractors were engaged.
If you are not a small company and you contract with PSCs either directly or via an agency, you are going to be affected by these reforms and need to be ready for those changes. April 2020 will be here sooner than you think so we recommend that you start planning now.
Picture: Gill Brown, head of the Employment team at Phillips Solicitors.