After much speculation about the implementation date, the Chancellor announced in the Budget that he would extend the IR35 reforms to the private sector from 6 April 2020.
Some organisations may breathe a sigh of relief that the reforms will not take effect until next year, particularly with Brexit looming, and take comfort from the extra time to prepare for this significant change. However, in reality there is still only a short period to understand the potential impact, identify any areas of potential risk and implement necessary changes to be ready for April 2020.
What are the changes?
While it seems likely that the rules will mirror those used for the IR35 Public Sector reforms, the Chancellor said that the private sector rules would only apply to medium and large businesses. So far, we have no formal definition of a small business for these purposes although the Government has stated that it will use “similar criteria” to the Companies Act 2006 definition of a small company (subject to consultation). As one of the criteria in the Companies Act definition refers to companies with ‘not more than 50’ employees, it will be interesting to see if the figure of 50 is used and which individuals are counted (for example, whether or not ‘deemed’ employees engaged via PSCs are counted for this purpose). There is much still to be resolved through the consultation and confirmed in the draft legislation.
The changes will affect businesses that engage workers through Personal Service Companies (PSCs), or any other intermediary such as a partnership or LLP. This is because the new rules will require the private sector organisation to assess if the intermediaries rules (IR35) apply to the contracts it enters into with any PSCs that are hired directly or via third parties.
Where the engager determines IR35 applies, the person or business paying the PSC (the fee payer) must apply PAYE/NIC deductions to the payment for the worker services, in other words treat the worker as a deemed employee for tax purposes. In addition, the fee payer must also account for employers NIC and potentially the Apprenticeship Levy.
These changes could result in an increase to the operating costs of the private sector organisation, whether:
- Directly as a result of being the fee payer or
- Indirectly - as those organisations lower down the supply chain seek to increase their charges to mitigate the potential increases in their tax and NIC obligations.
The Government has yet to respond on the other outstanding consultation on employment status (and the three employment rights consultations) that took place in 2018. If it does choose to adopt a statutory employment status test as proposed, this may be put in place in time for private sector businesses to use it from April 2020. At the very least, we envisage HMRC would expect businesses to use the existing CEST tool as their primary point of support.
What can you do?
Although the new legislation will not come into force until April 2020, now is the time to consider the potential impact so that you have sufficient time to introduce any changes required to manage your PAYE compliance effectively and efficiently.
As a starting point, it is important that you establish the profile of your use of PSCs, and potentially your wider non-payroll labour portfolio; your key stakeholders will need to have a clear understanding of:
- How many you use,
- Which parts of the business use them,
- How they are used, and
- How important they are to the different parts of the business.
A key element in this portfolio analysis is to understand what commercial contracts are in place and to consider if they remain fit for purpose going forward. From our experience with helping public sector organisations, it is often appropriate to introduce updated contracts that meet the needs of the organisation in the event IR35 will apply to a particular arrangement.
Once you can ensure that all PSC use is identified, processes must be put in place to guarantee that an IR35 assessment is completed before engaging with a worker supplied via a PSC. Clearly, it will be critical to identify which part of the business will be responsible for the IR35 review process, and to consider what level of knowledge there is in the business (ie if there is a need to train and support the relevant staff).
It is important for all private sector businesses to keep fully up to date with developments during 2019. Given that the reforms could dramatically increase the operating costs for private sector businesses - and have a significant impact on their operating models – it is vital to ensure that the reforms stay high on the agenda of the business’s key decision makers.
How can BDO help?
Our wide experience of both the public sector IR35 reform and the wider PAYE and NIC compliance obligations of engaging non-payroll labour means we can help you manage this complex issue compliantly and efficiently. We seek to work with you and the key stakeholders in the business to identify what contracts may be at risk, assess both the potential financial and operational impact on your business and implement changes that will minimise the impact of the new rules and build a robust compliance structure for the future.
If you have any questions please contact Stephanie Wilson, Jacqui Roberts or Nick Duffin.
BDO’s full guidance on extension of IR35 into the private sector
IR35 in the Broadcasting industry
Enquiries in the Healthcare sector
IR35 in the Financial Services sector
What NEDs need to know about IR35
Off-payroll rules and potential R&D relief
Read our brochure
See off-payroll labour on one page
View our recent webinar on the changes
Take our survey to assess your risk
IR35 - Are you the client, fee payer or another entity in the chain?
IR35 – How does status determination pass down your supply chain?
What is a small company under IR35 rules?
HMRC and Government activity
Our summary of draft legislation – July 2019
Consultation on the proposed changes – March 2019
The future of HMRC’s online Check Employment Status for Tax (CEST) tool
Existing public sector rules
Key information for public sector organisations