Prepare for off-payrolling in the private sector now

By Shona Duncan, senior tax manager

Changes to off-payroll working (IR35) rules come into effect from 6 April 2020 impacting on contractors working through a personal service company (PSC), recruitment agencies, and large and medium-sized enterprises as well as charities in the private sector.

The nature of employment within North Sea energy businesses means this sector could be most greatly affected by the changes.

Medium sized and large businesses and charities in the private sector will be required to assess whether the IR35 rules apply to any consultants, contractors and freelancers who are being paid via invoice from their limited company or partnership.

IR35 requires to be paid in respect of a person who provides services through a PSC, if that person would have been regarded as an employee of the end user, had engaged directly with the business, and would have been on the fee payers payroll and taxed and NIC accordingly.

Currently, where a private sector business engages a contractor through a PSC, liability to decide whether IR35 applies and to pay any employment taxes rests with the PSC.

Large and medium end users will be required to assess whether the IR35 rules apply to any consultants, contractors and freelancers who are being paid via invoice from their limited company or partnership.

This is a reversal of the current situation in the private sector, where the consultant has the responsibility to decide if IR35 applies when preparing their accounts.

The reformed rules have been in place for public sector organisations contracting workers supplied through their own personal service companies since 2017.

These latest changes are a marked difference in the way organisations in the private sector employ and pay contractors.

A recent poll showed three-quarters of UK organisations are not ready for changes to off-payroll working rules, leaving the business exposed to potential rising costs and a significant skills shortage in the future.

Failure to fully comply or to correctly assess contractors could lead to backdated demands for unpaid PAYE tax and NIC, and fines for delays and late submissions issued to the fee payers. It could also come at a cost to a firm’s image and reputation – harming its ability to attract contractors and other temporary workers, who are essential for adaptability and flexibility in changing markets.

So what should you be doing to prepare? Here’s my guide to getting ready:

• Carry out an audit of your contractor workforce. Be aware of how their services are provided – is it through an intermediary? If so, you may need to take on additional payroll costs, like employers’ National Insurance Contributions (NICs.)
• Be aware of the impact it could have on contractors inside IR35 who could see net income drop.
• Maintain good channels of communication with your contractors to take reasonable care to assess their status. Negotiate to help minimise fee increases and remember the employment status of contractors will need to be outlined in a status determination statement.
• Think about the impact on your supply chain and legal resources. When contractors operate through an agency, it is that agency’s obligation to deduct tax, and notify HMRC but you as large/medium end user have to make the status determination.
• Seek professional guidance - your tax advisor will be able to fully advise on the fundamentals, reporting requirements, actions and impacts.