This article is the first entry in Qubix's 'Countdown to IR35' blog series running up to the April 2020 deadline. The purpose of this blog is to support our clients that may be affected by the new employment tax changes in the private sector. Providing key updates, insights and solutions as we work together toward the IR35 rule changes so that informed, accurate status decisions are made to protect all parties involved.
The proposed rule changes
In October 2018, the Chancellor of the Exchequer delivered the Government's Autumn Budget. This confirmed that the proposed reform to the taxation of personal service companies (PSCs) in the private sector would come into effect from 6 April 2020 for large and medium sized businesses.
The draft legislation was published on 11 July 2019 and in essence, follow the rule changes already implemented in the public sector in 2017. These changes will now be extended to private sector contracts from April next year. This means that the responsibility for undertaking employment status assessments should now be the responsibility of the end client using the services of the contractor, whilst the responsibility for operating PAYE withholding will be that of the fee-payer of the contractor.
Furthermore, the legislation introduces the statutory concept of a 'Status Determination Statement' or SDS in short, which end clients must provide directly to the worker. This SDS must include two elements: 1) the decision of the client's "deemed" employment, and 2) the justification for reaching this conclusion.
The draft legislation also requires the end-client to take 'reasonable care' in their status assessment. This means end clients must provide accurate information to HMRC and consider individual circumstances in account when determining IR35 status. This was in response to 'blanket' determinations seen in the public sector.
Failure in doing so, or providing an SDS will result in the client being deemed as the fee-payer and the entity responsible for PAYE and NIC arrangements.
Who is impacted
- Recruitment agencies who supply contractors operating through PSCs
- Medium and large organisations who are using the services of 'off-payroll' contractors
- The contractor/freelancer
Why change the IR35 rules?
The Government's intention in introducing the new IR35 changes is to ensure that workers, who would have been an employee if they were providing their services directly to the client, pay the same amount of tax and National Insurance Contributions (NIC) as an equivalent employee.
The core issue relates to how payments are disbursed in different working arrangements. A salary paid directly to an employee is subject to tax and NIC which are handled by the employer through PAYE. In a PSC, the contractor receives payments as dividends, which are exempt from NIC. IR35 aims to prevent, what HMRC calls, 'disguised employees' from using this arrangement as a method to avoid employment taxes.
HMRC estimates that the cost of non-compliance in the private sector could result in a loss of £1.3bn by 2023/24.
IR35 tax recap
Inside - Contractors should be paying employed levels of tax and NI.
If the contractor uses Limited Company arrangement, the fee payer must deduct tax and NI before paying the Limited Company the net amount or the contractor will have to use an umbrella company and set up on PAYE.
Outside - Contractors can pay themselves directly a combination of salary and dividends which may be more tax efficient.
Under this arrangement, the fee payer will continue to pay the gross amount as before with no tax changes.
HMRC IR35 determination tool: https://www.gov.uk/guidance/check-employment-status-for-tax
End client responsibilities
End clients will have to determine IR35 status with contractors that they engage with from 6th of April onwards or any contractors that are already in place with an end date beyond 2020.
The Qubix IR35 position
- The are permanent PAYE employees of Qubix
- By providing project sub contractors that work to SOW’s that match business requirements with/to deliverables
UK Government Guidance: https://www.gov.uk/guidance/understanding-off-payroll-working-ir35
HMRC Employment Status Tool: https://www.gov.uk/guidance/check-employment-status-for-tax