The new rules for IR35 in the private sector will apply from 6 April 2020. This does not leave much time to understand the potential impact, identify any areas of potential risk and implement necessary changes to be ready for April 2020.
We have a strong team of experienced IR35 experts who are already helping businesses like yours assess the impact of the new rules and prepare for their introduction.
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What companies are affected by IR35 in the private sector?
The new rules will mirror those used for the IR35 Public Sector reforms. However, the private sector rules will only apply to medium and large businesses. To date there is no formal definition of a small business for these purposes although the Government has stated that it consult on using “similar criteria” to the Companies Act 2006 definition of a small company.
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.
How will IR35 affect my business?
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, they must 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 your business either:
- Directly as a result of being the fee payer
- 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 or 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.
How can you prepare for IR35 in the private sector?
Although the new legislation will not come into force until April 2020, you should be considering the potential impact so that you have time to manage your PAYE compliance effectively and efficiently.
As a starting point, it is important to 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 PSCs you use
- Which parts of your business use them
- How they are used
- How important they are to the different parts of the business.
This portfolio analysis will provide clarity what commercial contracts are in place and if they remain fit for purpose. 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 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. You may need to train and support the relevant staff.
The reforms could dramatically increase your operating costs and have a significant impact on your operating model. You should keep a watching brief on developments and ensure that they stay high on the agenda of your key decision makers. You could bookmark this page as it will be regularly updated with any news on the IR35 in private sector reforms.
How we can help you?
You can rely on us to help you manage this complex issue compliantly and efficiently. We have extensive experience of both earlier IR35 reforms in the public sector and the wider PAYE and NIC compliance obligations of engaging non-payroll labour.
We will 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. We can also help you build a robust compliance structure for the future.
I want support on IR35
BDO’s full guidance on extension of IR35 into the private sector
Manage the risks of non-payroll labour
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?
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
HMRC and Government activity
CEST has been updated – but has it been improved?
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
HM Treasury announces new Off-Payroll Review
Existing public sector rules
Key information for public sector organisations