New IR35 rules are now being rolled out in the private sector, and their implementation is worrying both companies and contractors who are not sure how they'll be affected.
IR35 is aimed at companies who engage off-payroll contractors and workers through personal service companies (PSC). A PSC is usually a company set up by an individual to provide services to a business, which then pays the PSC rather than the individual.
For the individual, the advantage of setting up a PSC is the limited liability protection that the company provides, plus the potential tax savings offered by being able to choose how they withdraw profits from the company.
For the company, using a PSC rather than hiring employees, currently means they're not required to pay National Insurance contributions (NIC) or deduct tax under PAYE. This can help the business make worthwhile tax savings, and they also benefit from the flexibility of engaging the PSC/individual only when they're needed.
HMRC, though, has been worried about possible tax avoidance and is changing the rules for IR35 in the private sector to close this loophole. Under the latest rules, NICs and PAYE must be paid if the individual would have been considered an employee if they had engaged directly with the company, rather than through their PSC.
Why should companies and contractors be worried? For both parties, it's the uncertainty about the contractor's status, and whether NICs and PAYE tax have to be paid.
HMRC has produced guidance and the CEST (Check Employment Status for Tax) tool, but to date the CEST tool has faced much criticism.
For companies, there's also the risk of failing to pay NICs and PAYE tax when they are due. Under the latest IR35 changes, the onus is now on the engaging company to 'take reasonable care' when determining whether the individual should be subject to IR35. If they are, whoever pays fees to the individual's PSC (it might be the engaging company or an agency providing labour to the company) has to pay the NICs and administer PAYE. Irrespective of whether the engaging company or agency pays the PSC, if the tax and NIC are not paid then the engaging company may ultimately be liable.
Our experienced employment experts will help you set up procedures to identify whether your PSCs are subject to IR35, and check that your HR processes are fit to cope with IR35's demands.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.