The government has announced that it will be making changes to the IR35 tax legislation, which will take effect from April 2020. CDS Recruitment’s payroll specialist partner, Kanopi Contract Services provides an insight into what this means for contractors.
What is IR35?
IR35 is a tax law. It is properly called the Intermediaries Legislation, also known as “off payroll working” and IR35 comes from the original press release published by the then Inland Revenue.
It combats tax avoidance by workers supplying services via a personal service limited company (PSC). If a contract is “caught” by IR35 then this means the worker would be an employee of the client if there had been a direct relationship.
The financial implications can be very significant as the PSC has to pay income tax and National Insurance Contributions (NICs) as if the LCC was solely an employee of the PSC.
How does it work?
IR35 is underpinned by employment legislation and subsequent case law evolved over decades by the UK legal system are applied. A hypothetical contract is arrived at by ignoring the intermediaries in the contractual chain and only looking at the actual nature of the working relationship between the LCC and the end client.
This involves applying three main principles to determine employment status. The degree of control the client has over what, how, when and where the worker completes the work. Is personal service required, or can the worker send a substitute in their place? Finally, is there the degree of mutuality of obligation necessary for an employment contract?
If the above three are found to exist to the degree required for employment, then other employment related factors are taken into account.
What is the April 2020 reform?
The new IR35 legislation is set to hit the statute book in April 2020 and introduces a number of fundamental changes to the way IR35 duties are collected in the private (and public) sectors. The new legislation does not alter the underlying IR35 test in any way.
The new rules are draft only as there is currently an ongoing consultation and a review of implementation both of which close 19 February. They include a requirement on the end client to decide whether a PSC worker is caught by IR35 or not, and to notify the worker in a statement – the Status Determination Statement (SDS). The SDS must explain the reasons for the decision, and the end client must take reasonable care in reaching the decision.
Unless and until the end client provides an SDS to the worker personally, the end client will always be liable for any IR35 liability (subject to a “small company” exemption). Where, as will often be the case, the end client is contracting with another company/companies, the end client can also pass the SDS to the next company in the chain with the result that they become liable and this continues down the chain until the buck eventually stops with the last person in the supply chain paying the PSC directly, referred to as the ‘deemed employer’.
For further information contact CDS Recruitment on 0191 300 1113 or email firstname.lastname@example.org