All contractors will be aware of the IR35 legislation in some way or another. The IR35 legislation requires an assessment as to whether work done by a contractor through their own limited company, or Personal Service Company (PSC) as it’s often referred to, falls within or out with the IR35 legislation.
Using well established criteria, such as Right of Substitution, Supervision, Direction and Control, Mutuality of Obligation and Business Risk, the legislation is designed to determine whether the contractor is effectively employed, or self-employed, for tax purposes.
Currently, this decision is made by the contractor. The risk, and subsequent liability of getting this decision wrong, also lies with the contractor. In 2017 changes were introduced to the public sector and these changes are now being rolled into the private sector in April 2020.
What is changing?
- It is important to note here that the rules themselves are not changing, however, the responsibility for determining the contractor’s IR35 status, whilst in a particular assignment, will shift from your own PSC (i.e. the contractor), to the end client. The liability for getting this decision wrong, lies with the ‘Fee Payer’. The ‘Fee Payer’ is the entity who pays the PSC, so this may be the end user, or more commonly, an agency.
- If the end-client determines you to be within IR35 (or caught by IR35 legislation), any payments made to the PSC (or contractor), must be subject to a deduction of tax and national insurance as if that contractor were an employee.
- With responsibility for determining your IR35 status lying with the end-client from April 2020, the government has developed an on-line employment status assessment tool to assist end-clients with this exercise. The tool is known as CEST, and can be accessed online at HMRC.
- If it transpires that, in making a status assessment, the end-client makes an error, responsibility for any underpaid tax and national insurance which arises as a result will lie with the end-client, or more commonly, with the agency (whoever is deemed to be the ‘Fee Payer’). It is worth a note that if the agency defaults on their responsibilities here, the liability will ultimately fall to the end-client company.
What to do next
Start entering into dialogues with your current end-user company now, especially where you are involved in an assignment which is likely to run over April 2020.
As end-client companies will potentially be held liable for any underpaid tax and national insurance, we anticipate that they will take their new responsibilities in this area very seriously and will be open to discussions with their contractors.
Each individual case will be different, so it is important to also consult with your accountant to discuss your specific circumstances. Please get in touch, if we can help, email email@example.com.
It is important to note that the proposed legislative changes have not yet been finalised, and are unlikely to be until later this year. However, we do not anticipate significant changes to the proposals.