In the October 2018 Budget the Chancellor confirmed that with effect from 6 April 2020 private sector businesses that engage contractors who supply services through an intermediary business (such as a personal service company) will be responsible for determining whether the IR35 rules apply. If the rules do apply, the entity paying the intermediary’s fees (the “Client”) will be responsible for operating PAYE and NICs on those fees.
The change, which reflects changes that came in for the public sector in 2017, was originally due to come in in 2019. The delay until 2020 is good news for businesses, but the change remains of real significance for a number of reasons:
- The Client, rather than the intermediary, will be responsible for determining whether IR35 applies. In essence it applies where an individual personally provides services to a Client via an intermediary, and the circumstances are such that if the arrangements had been made directly between the individual and the Client, the individual would be regarded as employed by the Client. Employers will need to get to grips with the tests for assessing employment status, and situations will need to be judged on a case by case basis.
- If the Client decides IR35 applies, then as the fee payer they will be responsible for deducting income tax and employees’ NICs from the fees, and will also need to pay employer NICs. This increases costs for all concerned so it is possible contracts will need to be reviewed and renegotiated.
- Payroll and accounting systems will need to be checked well in advance to ensure that they can cope with the changes.
“Small” businesses will be exempt from the new rules – we are waiting for clarification on which businesses will be classified as “small”.