Self Employed

Planned IR35 changes confirmed in 2018 Budget

Posted by David on October 30, 2018
CIS, HMRC, News articles, Status / Comments Off on Planned IR35 changes confirmed in 2018 Budget

Earlier in 2018 the government consulted on whether to alter the so called ‘IR35 rules, in effect whether to transfer the IR35 obligations from the hired Personal Service Company (PSC) to the hirer of the service.

These extended rules were first introduced in April 2017, though at that time the changes applied only to hirers in the Public Sector. However the latest Budget 2018 documentation confirms that the new rules will be extended to the Private Sector, from April 2020.

Make no mistake this is a very significant switch in responsibility. Whilst the latest information suggests that the precise nature of the changes will themselves be subject to consultation (including perhaps exclusion of ‘small businesses’ from applying the new rules), at this stage it is fair to assume the new Private Sector obligations will mirror the Public Sector equivalent. This will mean:

  • The body hiring the PSC and worker has to make a decision whether the particular contract is ‘caught’ within IR35. In short, the hirer must decide would the worker be their employee if the PSC had not been used. Employment status is of course a very complex employment case law test, which requires a full understanding of how the contract will operate practically (simply agreeing robust written terms will not be enough in itself).
  • If the contract is caught, the body paying the PSC must deduct and account for PAYE and NIC before it pays the PSC. If the hirer pays though an intermediary agency or employment business etc., the hirer must inform the intermediary agency of the PAYE/NIC obligation.
  • Apart from the extra cost to the hirer (e.g. the employer’s NIC cost) the practicalities of deducting PAYE/NIC at the same time as paying a limited company, which may have other obligations e.g. VAT payment, may mean that specialist software is needed.

What can be done?

We admit there is unlikely to be a ‘one size fits all’ solution that we can dust off the shelf. However the announced timescale and promised HMRC guidance should ensure that, with very careful planning and a flexible approach, any increases in outgoings can be managed.

Please contact ET4B if you would like to discuss this further.

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IR35 obligations where personal services are provided to Public Authority clients

Posted by David on February 28, 2017
HMRC, News articles, Payroll, Status / Comments Off on IR35 obligations where personal services are provided to Public Authority clients

There will be new ‘IR35’ rules to consider from 6 April 2017, where individuals provide their personal services to a Public Authority client via their own Personal Service Company (PSC). The planned changes apply for all payments made on or after 6 April 2017, whether or not the service etc was provided before that date.

The new obligations may be summarised as follows:

–           Firstly it is essential to decide whether the contract falls within the new rules, i.e. is the contractor supplying their services to a Public Authority client, as opposed to someone else (not always easy to tell, especially if there is a chain of contracts), and are they providing a personal service in doing so? NB: the stated definition of a Public Authority body is one which is required to respond to ‘Freedom of Information’ requests, but many smaller or subsidiary bodies are not actually sure if this applies to them.

–           If so, then the Public Authority client must make a decision whether or not ‘IR35’ applies i.e. would the worker be their own employee if none of the other ‘intermediary’ structures existed in the engagement chain?

–           If IR35 applies, the Public Authority must either withhold PAYE/NIC in full (accounting for this under RTI) or inform anyone else paying the PSC, in order that the payer may itself observe that obligation (the latter may apply if payments are routed through an employment business or agency to the PSC).

In making decisions on IR35 matters, HMRC expects the Public Authority to be able to rely on its new online digital status tool (which seems highly optimistic given that the tool was only made public by HMRC on 2 March, and there have been many signs in the ‘beta testing’ phase that the tool lacks robustness ). Whilst this digital HMRC tool may ultimately prove to be a useful guide, the distinction between employed and self-employed status remains a non-statutory test, so an effective working knowledge of employment case law is likely to be required.

This in itself assumes that the Public Authority will know enough about how the contract operates in order to make these decisions. Whilst HMRC insists that the IR35 rules are not being tightened fundamentally, all those in the contractual chain will need to have an operational understanding on these new procedures, as well as effective exchanges of information, to avoid PAYE/NIC simply having to be operated ‘by default’. This would inevitably cause upward pressures on the costs of the contract, if only for the fact that employer’s NIC would be due from the payer.

The most recent HMRC guidance also says that if the worker does not provide their services via a PSC, then the new rules don’t apply. Perhaps misleadingly, this guidance omits to say that more onerous obligations apply if the payer is a non-compliant Managed Service Company (MSC). In practice it may be very difficult to distinguish between a PSC, a compliant ‘umbrella’ payroll, and a non-compliant MSC, so specialist advice may be needed in cases of doubt.

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IR35 update – abolition of Business Entity Tests from April 2015

Posted by David on November 24, 2014
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Many readers will be aware of the ‘IR35’ legislation which was enacted some 14 years ago. It provides that if a worker supplied by a Personal Service Company (PSC) contractor would be an employee of the ‘end user’ of the service, but for the use of the PSC, then virtually all the income from the contract must be subjected to PAYE and NIC by that PSC. However employment status remains a matter for case law and the courts (or tribunals), rather than statute, to decide upon, thus a considerable degree of uncertainty remains.

In 2012 HMRC therefore announced a series of ‘Business Entity Tests’ (BETs) which would enable PSCs to self-assess whether they are at high, medium, or low risk of an ‘IR35 review’ by HMRC. However the ‘IR35 forum’ (a joint working initiative between HMRC and various other private sector bodies having an interest) has now confirmed the recent rumours, that the BETs will no longer be used from April 2015.

This has led to some speculation that the whole IR35 process may now be ‘withering on the vine’; however this is not quite how ET4B sees it.

In background, a House of Lords Select Committee was appointed in November 2013 to consider the consequences for tax revenues arising from the increasing use of personal service companies. After considering verbal and written evidence from various interested parties the Committee provided a report and the Government’s response to this report was published in June this year. In summary, and whilst the Government acknowledged that abiding by IR35 creates a significant cost to contractors, the simple abolition of the IR35 rules (as proposed by some, including the Office of Tax Simplification) was felt to be ‘unwise’ given the ‘Exchequer protection’ that the legislation is considered to generate.

On an even more cautious note, the Government also commented that it was unconvinced that the resources currently allocated by HMRC ‘were sufficient to ensure compliance with the IR35 legislation’. In addition (and on a separate point), the Government further committed to challenge in particular (non-PSC) ‘umbrella’ payroll companies who incorrectly apply for or misuse HMRC dispensations.

In a slightly more positive tone, some noises were made in the June response to suggest that HMRC guidance and requirements would be updated to ensure these become more relevant and pertinent. It is perhaps with this in mind that the abolition of the BETs has been announced. Rather than slowing down HMRC’s impetus on IR35, we think it is simply a question of HMRC belatedly accepting that the BETs do not fit the purpose for which they were originally intended.

Within the Public Sector there has been a tendency incorrectly to treat the BETs as if they are the only valid accurate barometer of IR35 compliance, thus ruling out many legitimate independent service providers and making the process less competitive.

Within the private sector there has always been a reluctance to accept the BETs as a valid guide to IR35 and in practice these have been ignored. We suspect that most PSCs who take the tests would at face value be deemed by HMRC to be at ‘high risk’ of review, but this strongly contrasts with the fact that very few of these contractors actually see themselves as within IR35. One of these assumptions must be wrong, and (as we always suspected) HMRC has in effect accepted that it is the BETs that are fatally flawed. The previously published HMRC Employment Status Indicator (ESI) tool (whilst not focussed directly on IR35, and despite having its own limitations) in truth provides a more accurate assessment of employment status.

Therefore whilst we cannot expect the HMRC IR35 review teams to simply ‘go away’, we can assume that in future HMRC will not rely simply on the (erroneously slanted) Business Entity Tests as justification for either commencing, or continuing with, a review.

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ET4B Spring 2013 Newsletter

Posted by David on May 29, 2013
Expenses and benefits, HMRC, News articles, Payroll, Status / Comments Off on ET4B Spring 2013 Newsletter

019B_ET4B Spring 2013 Newsletter

In our Spring newsletter we consider a number of topical items including the ever-popular
question of employment status, an RTI update, and details of recently announced changes to
childcare tax reliefs.

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