Changes to IR35 in 2020: What you need to know
What is IR35?
The off-payroll working rules (IR35) are designed to prevent ‘disguised employment’. Prior to the introduction of IR35 back in 2000, ‘off-payroll’ workers such as contractors and freelancers could avoid tax by providing their services via an intermediary – such as a PSC (personal service company). The rules do not prohibit the use of these intermediaries – but where workers would be taxed as employees if employed directly, IR35 ensures they pay roughly the same taxes either way.
IR35 does not apply to workers who are legitimately self-employed for tax purposes. Since the rules were implemented, it has been entirely up to the worker to designate themselves as either employed or self-employed. It is estimated that by 2023, this practice will have cost the government £1.3 billion in public funds. This has prompted several amendments to IR35. An update in 2017 across the public sector placed the responsibility of designating a worker’s employment status onto the client receiving their service.
What changes are being made to IR35?
The latest updates – announced in the 2018 Budget – are set to be implemented in April 2020, and are designed to see that all people working in the same way are subject to the same levels of tax. These new rules will bring all sectors, including the private sector, in line with the public sector – meaning that any medium or large company receiving a service will now have to designate an off-payroll worker’s employment status.
While it does not introduce a new tax and still excludes the genuinely self-employed, the new regulation means that organisations will be responsible for deducting correct income tax and National Insurance contributions (and paying employer NI contributions). However, in order to maintain a level of control for workers affected, a statutory client-led status disagreement process will provide an official way for decisions to be disputed.
The amended IR35 does not apply retrospectively – it is designed to cover new engagements rather than historic cases. As before, it is not intended to discourage the use of PSCs, and anyone can work through a company if it suits them to do so. HMRC has said that it will provide extensive support and guidance for organisations and workers affected by the change, in order to ensure the new rules are implemented correctly.
What do I need to do to prepare for the changes to IR35?
For workers, the most important step to take ahead of the updates is to use the government’s Check Employment Status for Tax (CEST) service as soon as possible. This is a regularly updated system which will determine whether the off-payroll working rules apply and allow for the necessary planning.
As the onus will be upon organisations to abide by the new rules, there are several ways to prepare. The first is to identify any individuals in the workforce who are using PSCs (including those engaged via agencies or other third parties) before undertaking a CEST assessment for all those whose services will continue to be used after April 2020.
It is also necessary to put processes in place for any future engagements after this date, including establishing who will be responsible for designating employment status, and for monitoring payments.
In order to ensure that you are fulfilling obligations correctly, you may find that you require the services of a qualified accountant. Should you be in need of such assistance, please feel free to contact us to discuss your individual needs.