The IR35 tax rules that apply to consultants working in the private sector through intermediaries such as personal services companies will change from the new tax year (2020).
The reforms will mean that the qualifying business using such consultants will have new responsibilities for the administration of HMRC related payments and may incur additional costs.
What is changing?
In summary, where the new IR35 rules apply it will be the responsibility of the end-user client to deduct PAYE and employee National Insurance contributions for the consultant and to pay employer National Insurance contributions on the consultancy fee.
The changes are to make it more likely that personal services company arrangements are not being used to artificially reduce the tax and NI liabilities for both the individual and client in circumstances where the consultant is effectively an employee.
These changes have already been implemented in the public sector.
What happens now?
Under the current IR35 rules, where a consultant is engaged through an intermediary (such as the consultant’s own personal service company), the intermediary is responsible for deciding what the consultant’s assumed employment status is for tax purposes and – accounting for PAYE/employer National Insurance contributions where this is appropriate.
What will happen under the new IR35 rules?
From 6 April 2020, where the client is affected by the changes in rules and makes the payment to the private services company, they will be responsible for:
- deducting income tax and employee National Insurance contributions from the consultancy fee and accounting to HMRC for them;
- paying employer’s National Insurance contributions on the consultancy fee.
The client of the consultancy service will have to determine each individual consultant’s employment status (for tax purposes). They will then need to let the consultant know the outcome and have a process in place to deal with challenges to the outcome.
Who is affected by the changes in rules?
The new IR35 rules will apply to medium and large companies. Small companies are not affected.
Small companies are currently defined as those with at least two of the following:
- more than 50 employees
- net turnover of over £10.2 million
- a balance sheet of over £5.1 million.
What should businesses do now?
- Review all consultancy arrangements to assess whether any would be classed as an employee if they were providing their services directly
- Consider whether alternative terms of engagement should apply (if direct employment is an option, employers should be aware of the potential for employment liabilities to accrue, for example, if there is an insufficient break between contracts)
- If the consultancy arrangement continues, decide if they will need to review fees, to take account of the additional IR35 tax burden
- Talk to the consultant about their findings and the impact on them.
How do you check a consultant’s employment status for tax?
Unfortunately, there’s no easy answer to this, and each case will need to be determined on the specific facts that apply to that consultancy arrangement. An on-line questionnaire-based tool is available on the UK Government website, ‘Check employment status for tax’, although this does not provide a failsafe method of assessment.
Factors that organisations should take into account when considering whether to engage an individual on a consultancy or employment basis include:
- Will the individual have the right to provide a substitute for their choice?
- Will they be paid a fixed / regular amount, regardless of delivery?
- Will the individual be required to accept any work offered to them?
- Can the individual work elsewhere while working for you? (This may be unlikely if they are contracted to work full-time hours for you.)
- Does the organisation decide how the work is carried out?
- Is the organisation obliged to provide a certain amount of work?
- Does the organisation control the consultant’s attendance, holidays etc?
The more control the client has over the work, the more likely it is that the relationship would be seen as one of employment rather than consultancy.
Consequences for failing to correctly account for tax and National Insurance contributions can be significant, and employer should be taking steps, and if necessary professional advice, before April 2020 to ensure they are not at risk.