In previous HaesCooper articles we have detailed the ‘off payroll’ tax rules that first came in from April 2017 for contractors operating within the Public Sector and the extension of these tax rules to contractors operating within the Private Sector as from 6 April 2020.
With little over a month from the start of the Private Sector off payroll rules HMRC have issued a Factsheet outlining what the proposed new off payroll tax rules are expected to accomplish.
The HMRC Factsheet says that contractors do not have to take any action in preparation for the proposed IR35 off payroll changes, as the proposed changes apply to the entity hiring the contractor, unless the hiring organisation (fee payer) is a small business. To be a small business, a business must have a turnover of less than £10.2m, a less than £5.1m balance sheet and less than 50 employees.
If the hirer (fee payer) is a small business, then they are not affected by the proposed new off payroll rules and the contractor remains liable for all IR35 compliance.
Medium to Large Business Private Sector Rules
In short, the new off payroll rules for contractors within the medium to large business Private Sector require the hiring organisations and the end clients decide whether IR35 should apply to each of their engagements with contractors.
However, the contractor can request from the hirer/client a Status Determination Statement – which will state if the hirer/client is to apply as from the 6 April 2020 the Private Sector off payroll tax rules and deduct PAYE/NI from the payments to the contractors and account for the PAYE/NI to HMRC, under the payroll regulations and their reasons for believing IR35 applies.
If the contractor wants to dispute the hirer/client’s stated IR35 determination then they have just 45 days to challenge the decision and discuss with the hirer/client ways of changing the contract in order to avoid IR35 being applied.
This all sounds doable but the problems are in the working out whether IR35 should apply which will mean the contractor agreeing to providing to the hirer/client the details in order to support that they are in business on their own account such as info on the contractor’s other business engagements which the contractor maybe reluctant to provide.
Most contractors have had a working knowledge of IR35 and what to do to support their view that IR35 does not apply to them including counteracting the attempts over the years of HMRC strengthening their IR35 hand in order to increase the tax/NI take for the Exchequer. If therefore come next April the contractor’s hirer/client determines that IR35 applies it is unlikely that the contractor will merely just accept this and for good reasons not least that if the determination is that IR35 applies from April 2020 what is to stop HMRC starting a IR35 investigation into the contractor’s tax affairs on the basis that the modus operandi of the contractor both before and after April 2020 is the same i.e. if IR35 applies to the contract from 6 April 2020 then IR35 applies to the contract before 6 April 2020 - a HMRC formal IR35 investigation will not be welcomed by the contractor!
Public Sector Payroll Rules
In addition as has been seen since the introduction from 6 April 2017 of the Public Sector off payroll rules the IR35 grief and cost is not just for the contractor as the hirer/client also suffers under the IR35 off payroll rules both in the cost of trying to replace the skilled contractors who have gone off to operate their self-employed business elsewhere and also the added cost of retaining a contractor within the IR35 regime i.e. the need for the contractor to increase their daily fee rates to cover their higher IR35 PAYE/NI and also the additional 13.8% cost to the hirer/client of the Employer’s NIC liability.
Employment Status of Contractors
Last but not least there will also be the Employment Law status of those contractors that are determined as being employees under the IR35 off payroll rules. HMRC’s simplistic approach is that IR35 only applies for tax/NI purposes. However, only last year HMRC were taken to the Employment Tribunal by a contractor operating within the HMRC who, having been told that IR35 applied and therefore PAYE/NIC was due to be deducted from the fee income paid to the contractor, merely asked the question –‘if I’m employed for tax, why I am not employed when it comes to holiday pay and pension entitlement?’.
The matter was settled by HMRC at the last minute before the case was to be heard by the Tribunal with the contractor receiving the full amount claimed in settlement of the case. So, if HMRC has no confidence in how it applies the rules what chance is there for businesses and their contractors! So, we may expect to see many more of these Employment Tribunal cases as the Private Sector IR35 off payroll determinations are rolled out as from 6 April 2020.
Perhaps the Chancellor’s next Budget as due on 11 March 2020 may shed some redeeming light on the proposed Private Sector IR35 off payroll rules.
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If you would like to discuss any of the IR35 rules mentioned in this article – or any other tax topics, please don’t hesitate to contact us.