The off-payroll working rules (IR35) aim to ensure individuals who work as employees pay broadly the same income tax and NICs as employees; they don’t affect the self-employed. But it is not always simple to establish whether someone is self-employed or not, and changes proposed by HMRC due to take effect in April may mean many self-employed workers will pay more tax.
The rollout of these changes, which is now under review to ensure that it is handled efficiently, follows reform of the rules for the public sector in 2017 when the responsibility for deciding whether a person was employed or self-employed shifted from the worker’s personal service company (PSC) to public authorities. The changes also made public authorities or agencies which pay workers’ PSCs responsible for both accounting for, and paying, income tax and NIC to HMRC under PAYE.
This left individuals outside the public sector, who work through their own companies, still responsible for determining whether the IR35 rules applied to them. Now the reform is being rolled out to all medium and large-sized organisations – this will take effect in April.
Difficulties for employers and workers
Right now many businesses are confused and have not prepared. The change is difficult to implement reliably in many cases and there is a risk that medium and large-sized organisations simply treat everyone as employees, to avoid the risk of an HMRC challenge.
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This could disadvantage many workers, who wouldn’t then be able to enjoy the various advantages of being self-employed – claiming capital allowances and allowable expenses such as office costs, travel costs, staff costs, and costs of business premises, training courses etc, and a proportion of costs including heating, electricity and mortgage for those who work from home.
Steps to take
- Don‘t panic!
- Consider whether you qualify as a ‘small’ business (meeting two of the following three criteria: turnover of £10.2m; balance sheet total of £5.1m or less, and/or not more than 50 employees)
- use the online CEST tool to get HMRC’s view of whether IR 35 applies to each engagement anonymously (whilst this involves time and work, the service is otherwise free and HMRC will stand behind the result unless they subsequently establish the information used is untrue. Although the service is anonymous, by printing out a copy of the answers provided and HMRC’s response, businesses can get assurance that if challenged they can defend the approach adopted to each engagement)
- use HMRC’s also confidential IR 35 helpline and contract review service which provides an opinion on whether a signed contract falls within IR 35
- take expert advice in complex cases.
In addition to these changes, we are seeing a lot of activity from HMRC’s fraud investigation service (FIS) in the field of employment status of workers. Individuals or corporate entities which face a challenge by HMRC need to take expert advice.