From April 2020, HM Revenue & Customs were to change the IR35 rules for individuals that contract through a Personal Service Company (PSC). Due to the COVID-19 outbreak the introduction of these rules is now to be delayed until April 2021. These changes are likely to result in increased tax for consultants, who should seek advice on how the rules will impact them.
What is IR35?
IR35 (otherwise known as the off-payroll working rules) is the term used to refer to tax legislation that was designed to make sure that workers who provide their services through an intermediary, but would be an employee if they were providing their services directly to the client, pay broadly the same tax and National Insurance Contributions (NIC) as employees. An intermediary will usually be the worker’s own PSC.
Current rules for public bodies
Back in 2017, HM Revenue & Customs introduced the off-payroll working rules for Public Bodies, such as Universities, NHS, local authorities, etc. This change effectively put the onus on the public body to decide if someone who works for them through their own Personal Service Company is caught by IR35. If they think they are, the engager must deduct tax and employee NIC from any payment made to the PSC.
Because of these rule changes, most public bodies have taken the safe approach and decided the majority of their intermediary workers are caught by the IR35 rules. This was because the public body can be liable for the unpaid tax and NIC if they don’t apply the correct treatment.
New IR35 rules
Currently, where individuals outside of the public sector work through their own PSC it is the PSC that is responsible for determining whether the rules apply and paying any tax and NICs due.
From April 2021, the off-payroll working rules will be extended to most private sector businesses, meaning from this date private sector employers hiring individuals through a PSC will be responsible for determining their IR35 status. However, the rules only apply to medium and large sized businesses engaging workers through a PSC, as there is an exemption for small businesses.
How will this affect me?
As a result of these changes, if a worker provides services through a PSC to a public sector business, or a medium or large-sized private sector business, they should get an employment status determination from the business as well as the reasons behind that determination.
If the off-payroll working rules apply, any fees paid to the PSC from April 2021 will be subject to tax and NIC at source.
It is expected that businesses in the majority of instances will err on the side of caution and treat workers as caught by the new rules. The worker can appeal against an employment status determination if they disagree with the decision, but only for the engager to review and if appropriate justify their original decision.
What should I be doing now?
It is important for individuals running their own Personal Service Company to act now in advance of the April 2021 changes. Planning for these changes can avoid any nasty surprises once the new rules take effect.
Areas that should be under consideration are:
- Reviewing client contracts and business relations to check whether IR35 could be applied to them
- Liaising with their clients to ascertain if a determination status has been prepared (or is going to be prepared)
- Reviewing the determination status to ensure it is correct
- Undertaking forecasts of their tax bill and take-home pay post April 2021 to see how the new rules will impact them.
Shorts are here to help
We have a dedicated planning team ready to provide tax advice to individuals on the impact of these new rules, prepare appeals to status determinations (if applicable) and assist in minimising the financial and commercial impacts these changes will have.
Begin your journey with us today. Drop us a line and let's start talking about how we can save you tax.
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Stephen Allender
View my articlesTags: Business Taxes
