Everything you need to know about IR35 rule changes

Back in 2000, the off-payroll rules – commonly known as the IR35 rules – were introduced to tackle ‘disguised’ employment. This April, new legislation comes into force which marks the biggest change to these regulations in two decades.

The changes aim to tackle what the government consider an abuse of tax and National Insurance contributions relating to off-payroll labour. Many medium and large businesses who hire workers through an intermediary will be affected by the changes.

What are the IR35 rules?

The IR35 regulations are designed to ensure that, when an individual works as an employee but provides their services through an intermediary company, they pay broadly the same amount of tax and National Insurance contributions as a direct employee would.

The intermediary can be:

A worker’s Personal Service Company (PSC)
An umbrella company
An individual
A partnership
A managed service

The IR35 rules look at whether an individual, in the absence of an intermediary, is regarded as an employee. There is a series of tests which include:

Whether the worker can provide a substitute worker if they are unable to carry out work themselves
Whether the employer is obliged to offer work and whether the worker is obliged to expect it
How much control the business has over how the worker undertakes their work
Whether the individual has any financial risk when they carry out the work.

Failure to implement the new rules correctly can result in financial consequences, so it is important that businesses make sure they are compliant. Here is a summary of five key changes due to be implemented in April.

5 important IR35 changes due to come into force in April 2020

1. The end client is responsible for determining the IR35 status of a contract

From this April, the end client now has to determine whether a contract sits inside or outside IR35 rules.

Previously, in the private sector, it has been the responsibility of the limited company being contracted to do the work to establish whether a contract is inside or outside IR35 rules.

This April, the rules will be aligned with the public sector, where the responsibility lies with the end client or agency.

2. The small business exemption

The new IR35 rules only apply to medium and large businesses which means the regulations do not apply to businesses which meet two or more of the following criteria:

Fewer than 50 employees
Annual turnover under £10.2 million
Balance sheet total under £5.1 million

If two of the above criteria are met, responsibility for determining the IR35 status of a contract remains with the PSC and the changes do not apply.

Note that there is no such small business exemption for public sector organisations. The legislation will apply to all end clients engaging PSC workers in the public sector.

3. A Status Determination Statement (SDS) must be provided

Under the new rules, the end client must provide an SDS to confirm the IR35 status of a contract. This must be provided to the PSC worker and, if an agency is involved, a copy must be provided to the agency responsible for paying the PSC.

4. SDS-issuing organisation responsible for employment tax liabilities

The new rules are designed to ensure that the body who issues the SDS (or the fee-payer if there is an agency involved) is responsible for any employment tax liabilities.

What these new rules also mean is that HMRC can recover tax from a ‘relevant person’. This means they can recover tax from the highest party in the labour supply chain which is not complying with the legislation.

5. Withdrawal of 5% administration allowance (in most cases)

The draft legislation set to come into force in April removes the 5% allowance for PSCs to meet the administration costs of implementing the IR35 rules.

However, the allowance will continue for PSCs working with small businesses, as discussed above.

What will these changes mean?

With further clarification expected in the March budget, it is difficult to predict what changes these new regulations will have. There could be fewer contractors, or contractor rates could change. And where will these increased costs be met?

Despite many organisations (including the Federation of Small Businesses) calling for the government to postpone the introduction of these new rules, they are set to come into force on 6 April 2020.

So, if you are a business engaging a contractor on a project that will run into the next tax year, you should seek advice now.