It seems like yesterday that I was blogging about IR35 being introduced in the public sector! Three years later, and as expected, we are facing the reality of IR35 affecting the private sector, which will take effect from April 2020. Public consultation ends on 28 May 2019, but if previous consultations are anything to go by, the legislation will be passed in the summer. Contractors, agencies and end user clients need to be prepared for a significant shift in responsibility, and obviously more red tape and paperwork.
If you are a recruitment company, you should be aware of the following changes:
IR35 will only affect contractors working for end user clients who are defined as either “medium” or “large” business, as defined by the Companies Act 2006. Therefore, you need to find out if the end user client satisfies two out of the three conditions below:
- Turnover greater than £10.2 million;
- Aggregate assets on the balance sheet greater than £5.1 million; and
- More than 50 employees.
If your end user is a “small” company nothing changes and life can continue as normal. However, if they are either a “medium” or “large” company then you need to make some significant changes to your processes, and you need to be aware of your new responsibilities.
The compliance risk will be moving away from the contractor to the entity paying the contractor, including agencies. Therefore, you will be taking all the risk and potentially will be exposed to late payment of PAYE, NIC, interest and penalties. That is if HMRC were to successfully challenge a failure to withhold tax and you incorrectly assessed the status of the contractor.
Once you have applied the CEST test (Check Employment Status for Tax) and have made a decision that the contractor is caught by IR35, you will need to deduct PAYE and NI from the contractor’s limited company. To make matters worse you, as the agency, will have to pay employers NIC at 13.8% and potentially the Apprenticeship Levy.
Therefore, are you prepared to reduce your margins or do you need to review your contract with your client to make sure this extra cost is being borne by the client?
Affect on Contractors
IR35 affects contractors in two ways:
- Tax is being deducted at source monthly so they could be worse off by 32% per month (PAYE at 20% and employees NIC at 12% up to those earning up to £43,356 and then 2% thereafter).
- Tax is being deducted as if the contractor is an employee but they do not receive any employment benefits whatsoever.
What you need to do
As a minimum I suggest all agencies undertake a review of their contractors. If they are not working for a “small” company they should undertake a CEST review to see if they would be caught by IR35. If they will, then you need to review the contract between the contractor and end user. You should see if there is a way to change the contract so it is not caught by IR35. If the test declares that they are not caught by IR35, you also need to address whether you are comfortable not deducting tax, bearing in mind the additional risks that you are now taking.
You should also review your contract with your client. If the contractor is caught by IR35 then you are able to pass the additional costs onto the end client.
If you are a contractor working through your personal service company then you should be speaking to your agency and accountant to discuss your options.
Do not leave this to the last minute as you will need to review your internal processes to ensure you are not exposed financially. Once the legislation has been finalised I will provide further guidance.
If you need to discuss any matters now, contact me at firstname.lastname@example.org.
Written by Lee Manning
0203 146 1604
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