ersg guide to IR35 legislation
*UK IR35 Update with a key clarification regarding overseas workers*
The Governments review of the off-payroll working rules has now concluded and there are several pertinent updates:
- The review has clarified where the 𝐜𝐥𝐢𝐞𝐧𝐭 of the services is 𝐰𝐡𝐨𝐥𝐥𝐲 𝐨𝐯𝐞𝐫𝐬𝐞𝐚𝐬, with no subsidiary or presence in the UK, the new off-payroll rules will 𝐧𝐨𝐭 apply.
- There will be no penalties for inaccuracies in the first 12 months unless there is evidence of deliberate non-compliance
- The rules will only apply to payments made for services provided 𝐨𝐧 𝐨𝐫 𝐚𝐟𝐭𝐞𝐫 6th April 2020
You can find further clarity on other aspects of the IR35 changes here: https://bit.ly/390XdPo or of course you can get in touch with your dedicated Consultant here at ersg.
IR35 legislation is changing from April 2020 and will affect all contractors working in the private sector in the UK.
On 11 July 2019 HMRC published the draft legislation for the off-payroll working rules affecting UK PSC contractors. The legislation is primarily updating existing off-payroll legislation drafted for the 2017 roll-out in the public sector.
ERSG have created an IR35 guide to help explain the changes, how you might be affected and how ERSG are preparing to handle the IR35 reform.
ERSG will communicate regularly on the subject until the April 2020 deadline providing updates and action plans but in the meantime, please feel free to contact [email protected] for further information.
NEW IR35 RULES 2020 - EXPLANATION AND ACTION PLAN
What is happening and when?
What: Due to wide non-compliance with the IR35 rules, the government introduced reforms in the public sector in April 2017 – these are known as the “off-payroll rules”. As anticipated, the Chancellor announced at Budget on 29th October 2018 that the government will also reform the off-payroll working rules in the private sector.
When: New changes will be implemented from 6 April 2020.
What’s the biggest change? From April 2020, that liability for assessing IR35 status is no longer on the contractor’s intermediary but on the client.
What’s the latest update? The draft legislation for extending the off-payroll rules into the private sector was published on 11th July 2019. There is a technical consultation over the summer, but the legislation will come into force from April 2020.
Here’s what you need to know:
What is IR35?
IR35 is the name given to tax legislation in the Income Tax Earnings and Pensions Act 2003 (ITEPA) and applies to individuals supplying their services through an intermediary, usually a PSC.
In simple terms, IR35 means that if the intermediary did not exist and the individual supplied looked like an employee of the end user client, then the individual should be subject to employee taxes and social contributions. This is commonly known as “inside IR35”. If IR35 applies, then the intermediary has to operate PAYE and National Insurance contributions on the contract rate.
Why has IR35 changed?
The IR35 rules were originally introduced in 2000 with the intention of ensuring that individuals who are working like employees but who operate via an intermediary, pay broadly the same tax and national insurance as an employee would. However, they were largely ineffective in HMRC’s opinion due to contractors self-assessing their own IR35 status.
• HMRC determines that 1/3 of people working through their own company should fall within IR35 and be taxed as employees (but only 10% of this group think they should be taxed in that way).
• HMRC estimates the cost of non-compliance in 2017/2018 at £700M and to increase to £1.2B in 2022/23.
What are the main changes?
Currently in the private sector the person providing services through their own PSC is responsible for deciding if the IR35 rules apply. As highlighted above, from April 2020 this responsibility for operating the off-payroll working rules will move from individual contractors to the end client organisation. This means that private sector end-clients (unless classed as a “small business” under the Companies Act 2006) will be required to provide a status determination statement including the decision as to whether the off-payroll rules apply (“inside IR35”) or do not apply (“outside IR35”) and “explain the reasons for that conclusion” to the first party in the contractual chain (ie the recruitment business/agency) and also to the worker directly.
There is not a time by which the client needs to provide the status determination statement (currently start
date under the existing public sector rules). The rationale is the client must provide this statement and carries the liability of fee payer until it does so.
Where the client concludes that IR35 applies, the fee payer (which may be the end user themselves, a recruitment agency, or other third party paying the intermediary) will be responsible for accounting for and paying the related tax and NIC to HMRC, including the additional cost of Employer’s NIC.
The new rules aim to reduce the cost of non-compliance and make it easier for HMRC to monitor and enforce compliance in the future.
Client-led status disagreement process
The worker or the deemed employer (the fee payer) can make representations to the client that the conclusion mentioned in a status determination statement is incorrect.
The client has 45 days from the day the representations are received to either:
• inform the worker or (as the case may be) the deemed employer that the original conclusion is correct and provide reasons; or
• Give the worker and the deemed employer a new status determination statement which contains a different conclusion and state that the previous status determinations statement is withdrawn.
If the client fails to comply then from the end of the period of 45 days the client is treated as the fee payer, with the accompanying liability to pay tax and NICs.
How is ERSG preparing for the IR35 changes?
• Our Legal Team is keeping abreast of the latest developments by attending professional IR35 seminars and workshops.
• We are also working closely with the REC, a professional body for recruitment businesses, which is keeping its members informed of any new developments on the off-payroll working rules in the private sector and their meaning for the recruitment sector specifically.
• We have formed an internal IR35 working group of senior managers from across all functions to create, implement and review strategy.
• We are working with our clients to help them navigate through the changes and ensure that we understand their strategy and plan accordingly.
• We are assessing our current contractor base to identify those likely to be impacted by the new rules.
• We are rolling out a company-wide internal training on the new IR35 rules.
• We are identifying internal and external capabilities to manage IR35 and adapting our internal processes.
• We are sending external communications to the workers operating via intermediaries such as PSCs to keep them informed of ERSG’s strategy with regard to the IR35 changes.
• Our Legal Team is busy updating our contract templates and will be issuing new contracts to all contractors affected by the changes.
• ERSG’s Legal team has reviewed its PSL for compliance partners and formed strong partnerships with a small number of umbrella companies specifically chosen for their extensive involvement and experience with the roll-out of the off-payroll working rules in the public sector. We are holding continuous discussions with our compliance partners to provide our clients and contractors with the most cost-effective compliance solution.