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From April 2020, HMRC is introducing changes to off-payroll working. Known as IR35, this is already a notoriously complicated piece of legislation. Get your head round the new rules with our guide to the changes to IR35.

What are off-payroll working and IR35?

Off-payroll work refers to services by contractors who bill a company for their time via their limited company rather than being paid through its payroll system, for example freelance consultants and contract couriers.

Most people who work in this way genuinely are self-employed contractors, however there have been cases of employers paying workers off-payroll to avoid paying employers’ National Insurance contributions (NICs) and providing employee benefits such as holiday entitlement, sick leave and a more favourable notice period. There are also tax savings for limited companies who bill for their services in this way.

To combat this practice, HMRC introduced a piece of legislation known as IR35 designed to determine whether a worker can be classed as employed or self-employed. Contractors who are deemed to be employed are required to be paid in the same way as full-time employees and must pay National Insurance and tax via the company’s PAYE system.

The rise of the so-called “gig economy” has highlighted IR35 in the media in recent years, most famously in 2016 when Uber drivers won the right to be classed as employees rather than self-employed workers after winning a key employment tribunal against the company.

Changes to IR35

Under the current rules, it is the responsibility of the worker to determine their employment status. The fee payer is not obliged to challenge the worker’s conclusion, however if HMRC were to successfully argue that the worker had got it wrong, it would be the worker who would be liable for any associated penalties in addition to the extra tax and NICs.

The Government announced in May 2018 that this would change from April 2020 where individuals were providing services to large or medium-sized organisations through an intermediary (i.e. their limited company or an employment agency) in the private sector. From this date the responsibility for determining the employment status will shift from the worker to the fee payer.

Similar measures have already been in place for public sector organisations since 2017. HMRC reported that this had resulted in increased compliance in this area, hence the extension to the private sector.

Under the new rules, businesses will need to determine the employment status of a worker prior to engaging with a worker and will be required to communicate their conclusion in writing to the worker by way of a Status Determination Statement (SDS)

Where there is a supply chain – e.g. if a worker is being contracted via an employment agency – the fee payer is responsible for communicating the employment status to both the worker and to the agency who will pay them. If a worker disagrees with the fee payer’s determination, they have 45 days to respond in writing to dispute it.

Who do the changes to IR35 apply to?

The changes to IR35 apply to all companies, with the exception of small businesses. Companies are classed as small if they meet at least two of the following criteria:

• Annual turnover below £10.2 million
• Balance sheet assets less than £5.1 million
• No more than 50 employees

It should be noted that all related entities must be considered in aggregate where companies are part of a group structure.

Unincorporated businesses (sole traders and partnerships) can be classed as small if turnover is less than £10.2 million.

What constitutes employment?

There is no black and white definition of what constitutes employment, which is why many people find it such a confusing piece of legislation. Employment status is calculated based on various factors and circumstances such as:

• The worker’s responsibilities
• The level of control exerted over the work by the fee payer
• The way in which working hours are decided
• The method of payment
• The notice period
• The financial risk to the worker

HMRC has provided an online tool known as CEST (check employment status for tax) which can be used to assist in this decision. After inputting various pieces of information about the engagement, the tool provides an answer with reasons as to whether the worker should be regarded as employed or not. HMRC has confirmed that they will generally stick by the result given by CEST, providing the information entered is accurate.

Talk to the experts

If you’re unsure about the new rules or are struggling to work out the employment status for your workers, HMRC recommends you seek professional advice. Our tax expert Paul Guthrie is happy to take your queries. Contact him at paul.guthrie@ttrbarnes.com for further information.