IR35 - Finance Bill 2019 draft provisions for private sector from April 2020
By Justine Riccomini, Head of Taxation (Scottish Taxes, Employment & ICAS Tax Community)
15 August 2019
Justine Riccomini takes us through the main points of the proposed legislation for inclusion in FA 2020 relating to IR35 in the private sector.
Background
The proposed amendments to the IR35 rules in the private sector at Part 2 of ITEPA 2003 have now been set out, affecting chapters 8 and 10 of the Act. This aims to align the private sector treatment with that currently operating in the public sector since April 2017, but practitioners should note that there are some key differences.
The three layers of the IR35 Universe
Prior to April 2017, anyone engaging a contractor through an intermediary had no responsibility for making deductions from payments made to them. Things have since changed dramatically, leaving us with three distinct ‘IR35 approaches’.
1. The Public Sector engager
After 6 April 2017, the legislation known as IR35 was divided into two discrete approaches – the public sector engager had to determine whether IR35 applied and if it did, the payer of the invoice from the Personal Service Company (PSC) had to deduct PAYE and primary (employee’s) NICs, and in addition, pay secondary (employer’s) Class 1 NICs on that payment. The private sector carried on as before.
2. The private sector- medium and large engager
From April 2020, the public sector approach has been replicated and adapted slightly and will apply to medium and large employers in the private sector. Such engagers of contractors will now need to begin by determining the contractor’s employment status prior to commencement of the contracted works, and communicate that determination and the reasons for it to the worker and the fee-payer (if this is not the engager) by way of a Status Determination Statement (SDS) (under draft section 61NA of the Act). If the engager determines that the contract falls within IR35 – in other words, but for the existence of the intermediary, the worker would be classified as an employee of that engager), the fee-payer (which may be an agency) will need to deduct PAYE and primary NICs from the value of the invoice and also pay over a corresponding value of secondary (employer’s) NICs through the Real-Time Information platform.
There are separate definitions (see below) of what constitutes medium and large private and third sector/not-for-profit entities.
3. The private sector - Small engager
Small engagers are exempted from the changes noted above and will continue to interact with their contractors in the same way as they have always done. There are specific rules by which small engagers are not classified as exempt – see below.
Essentially then, there are three different approaches now to IR35 compliance – adding to the already complex nature of this legislation.
The transfer of liability concept
The engager retains responsibility for the PAYE and NICs liability. However, if there is a supply chain, this responsibility for PAYE and NIC can pass down it if the SDS is passed on – and so the SDS plays a pivotal role in deciding who is liable for any IR35 tax and NIC.
Crucially, if any party in the chain fails to fulfil its obligations in relation to paying over the liability, the liability passes back up the chain to the next person, who then becomes the deemed employer and must account for and pay over the liability. Clearly, the parties need to understand the supply chain and ensure that each fulfil their responsibilities
Making a status decision
The proposals require the engager to decide upon the employment status of the worker in the context of that engagement, taking reasonable care whilst doing so, before passing on that determination and the reasons for it to the worker. The engager is expected to maintain a record of its decision-making process. The worker is entitled to query the decision under a client-led dispute resolution process. The engager has 45 days to respond in writing, providing reasons for their decision. Either the original decision stands, or the worker and fee payer must be given a revised SDS. If the engager fails to provide a response within 45 days or fails to provide reasoning, the engager will take over the fee-payer’s responsibilities.
Note that this process will also apply to public sector arrangements from April 2020. Currently, the public sector engager has 31 days to respond.
HMRC has not provided for an appeals process or any form of mediation service and has effectively stepped away from dispute resolution, leaving it to the parties concerned to resolve.
Improvements to the Check Employment Status for Tax (CEST) tool
HMRC has stated that it is making improvements to the “Check Employment Status for Tax” tool (CEST) and the new version will be launched “towards the end of 2019”.
Small, Medium or Large?
Businesses are medium or large by default where they do not qualify as ‘small’ – with ‘small’ falling under the definition in the Companies Act 2006 unless they are ‘connected’ to or in a Joint Venture (JV) with a medium or large business. The contractors engaged by ‘small’ businesses will be expected to decide whether their contract falls within IR35, as before.
Medium and large third sector or not for profit businesses will qualify if they exceed the turnover test in Companies Act 2006 alone.
Small businesses are not currently required to declare they are small and therefore exempt from IR35. Growing businesses will need to consider carefully when they become qualifying businesses and be ready to communicate this fact and understand how to determine status. A business which ceases to be medium or large and becomes small will need to declare this to its contractors and fee-payers prior to the commencement of the next tax year.
Managed Service Companies
The Managed Service Companies legislation currently set out at Chapter 9 of the Act has already been amended to include them in this regime.
Retrospection, and settling in time
HMRC has declared that this reform is not retrospective, and it is only anticipating compliance for new engagements. Furthermore, it advises that it will not be carrying out targeted campaigns into previous years where engagements are deemed to be within IR35 for the first time. A settling in period is being given for organisations to get it right – this is anticipated to be around 12 months.
Whatever happened to the 5% allowance?
This allowance is deducted from the top of the deemed IR35 calculation to account for expenses and administration costs of running a business. From April 2020, it will be removed for any engagements undertaken with medium or large businesses which are inside IR35. It will continue for those engagements deemed inside IR35 with small business engagers.
Pension contributions
The question raised by HMRC in the consultation which closed in May 2019 regarding the possibility of deemed employers being required to make pension contributions in respect of contractors inside of IR35 was not taken forward.
Guidance
HMRC has stated that revised legislative provisions and detailed guidance for engagers and SAOs will be made available in late Summer
Feedback to HMRC by 5 September
HMRC has asked for feedback on the proposed legislation by 5 September 2019. If you have anything you wish the Tax Team to feedback to HMRC, please contact us by 29 August.