IR35 tax legislation changes for Contractors: April 2020
The reforms govern the tax treatment of workers who utilise a Personal Service Company (PSC) to supply their services.
IR35 (also known as the ‘off-payroll rules’ or the ‘Intermediaries Legislation’) is a tax regime affecting contractors, which is designed to make sure everyone that does the same job in the same manner pays similar income tax and national insurance.
Where a contractor’s assignment is assessed to be ‘inside of IR35’ (which means that the contractor’s working arrangements have similar key features to that of an employee), income tax and national insurance must be deducted from the contractor’s pay.
Currently, in the private sector, it is the contractor’s personal service company which is responsible for assessing whether the contractor is inside or outside of IR35 and to make the required tax deductions.
The Government’s view is that a significant percentage of contractors are not assessing and paying tax correctly, which is the main reason for these reforms.
What is changing?
From April 2020, the responsibility for determining whether a contractor’s assignment is inside or outside of IR35 will pass to the end-client who receives the contractor’s services.
The responsibility for deducting and paying tax from the contractor’s pay will also move, to the party which pays the contractor’s limited company (usually, this will be an employment agency).
The change will not apply where the end-client is a small company, which means a company which meets any 2 of the following criteria:
- Annual turnover of not more than £10.2 million;
- A balance sheet total of not more than £5.1 million;
- No more than 50 employees.
Full details of the legislation are available here:
What does this mean for you the contractor?
If you are currently working via a personal service company and your assignment continues beyond April 2020, the end-client will need to determine whether your assignment is inside or outside of IR35 prior to the changes taking effect.
Essentially, if the end-client determines that your assignment is inside of IR35, Scantec will be required to deduct income tax and national insurance from your pay and pay this to HMRC.
If the end-client decides that your assignment is outside of IR35, you will be able to continue working through your personal service company and no tax deductions will be made by Scantec.
If you currently work via our PAYE or Umbrella models, or receive payments to your personal service company net of income tax and national insurance, these changes will not affect your pay.
Is my assignment inside IR35?
The Government’s Check Employment Status for Tax (CEST) tool is designed to help determine whether an assignment is inside or outside of IR35.
CEST has come in for a lot of criticism from various industry bodies and lobby groups and the Government has stated that it will be making improvements to the tool and issuing further guidance prior to April 2020. We are also aware of industry bodies currently trialling additional assessment tools but will know more in towards the end of the year and will keep everyone updated.
The Government’s IR35 help service is also available if CEST does not provide a clear answer:
Phone: 0300 123 2326
That being said, although you may perform due diligence, it is up to the end-client to determine IR35 status and they may opt to use alternative tools/methods to make their decision.
Disagree with client’s status findings?
The Government has announced that end-clients will need to provide contractors with written reasons for making an IR35 determination, if requested, and must also provide contractors with the right to appeal against the decision. Further guidance is expected on what form the appeal process must take and we will keep you updated.
What are we doing to help you?
Now that we have the detailed legislation, we will be working closely with our clients and contractors to help ensure that they are prepared for the changes and that they review assignments and engage with contractors in good time ahead of the rules coming into force.
We already have significant experience of helping clients and contractors deal with changes to IR35, following similar changes being introduced for our public sector clients in 2017.
We therefore wanted to make you aware of our legal advisor’s IR35 assessment tool, which is built using proprietary information from Top 4 Professional Services Company, EY, and is based upon actual case law rather than a subjective interpretation of the IR35 legislation.
In addition, our legal advisors can provide consultancy support to assist you with implementing the tool and your IR35 role profiling project.
Key aspects of the online IR35 assessment tool:
- Built using EY’s proprietary information, the tool incorporates a full audit trail;
- Clear questions and a supplementary narrative allow for the full detail of each role to be examined;
- Flexibility to review both roles and individuals provides a suite of options to the end-user;
- A risk-based scoring mechanism affords you the opportunity to make informed decisions to protect your business;
- Scores are given after each section is completed, providing a quick insight to the key risks and possible mitigation strategies;
- A final score is provided at the end of each assessment;
- All parties in the supply chain have access to the system, providing complete transparency over the information entered and the corresponding risk rating outcome;
- A document is produced with an overall score and summary for each section, providing you with evidence of the status decision reached and a demonstration that ‘reasonable care’ has been taken.
If you have any queries, please us the following email address to log your query or speak to your normal Scantec contact.