The rules for individuals providing services to the public sector via an intermediary such as a Personal Service Company (PSC), changed from April 2017. The new rules shifted the responsibility for deciding whether the intermediaries’ legislation applied, known as IR35, from the intermediary to the public sector receiving the service (also known as the engager). Where a contract is deemed to fall into IR35, the public sector body is responsible for deducting tax and National Insurance Contributions (NIC) from the payment to the contractor. The intention of the IR35 legislation is to prevent businesses and individuals avoiding the increased tax and NIC costs associated with employment by interposing an intermediary – generally a personal service company. The legislation is not intended to catch genuine self-employment, but the government has long been concerned that contractors are incorrectly categorising engagement as falling outside IR35 rules, leading to a potentially substantial loss of tax and NIC.
In the 2017 Autumn Budget, the Government announced plans to extend these rules to off-payroll working in the private sector. The new rules come into effect from 6 April 2020. For private sector contracts, the obligation to determine whether any contract falls within IR35 and if so to make the necessary deductions will fall on the engager for all payments from April 2020. From this date, all the medium and large-sized clients will be responsible for deciding the employment status of worker.
The changes mainly apply to businesses with an annual turnover of more than £10.2 million (known as the simplified test). If the simplified test does not apply, then the rules still apply if the private sector client meets 2 or more of the following conditions:
- an annual turnover of more than £10.2 million
- a balance sheet total of more than £5.1 million
- more than 50 employees
If you meet the conditions above, you must start applying the rules when the changes come into force on 6 April 2020.
HMRC has also confirmed that it will not apply these new rules retrospectively unless there is cases of suspected fraud or criminal behaviour and it will only use information resulting from these changes to open a new enquiry into earlier years if there is reason to suspect fraud or criminal behaviour.
You can check employment status for tax (CEST) through the toolkit available from HMRC by following series of step by step questions in the gov.uk link below.
HMRC has said that it will stand by the result produced by the tool provided the information input is accurate and the tool is used in accordance with their guidance. They are launching a new CEST toolkit before the end of this year, which should help reduce the confusion and errors that we have seen in some of the employment status determinations to date. The tool can be used in anonymous manner and it won’t store any information you enter or the result given therefore you should print your result for your own records.