We have set out some topical tax points you may like to consider during the 2018/19 tax year to ensure that you are minimising your tax…
The Government has now published the Finance Bill 2019-20 which contains the draft reforms for the off-payroll legislation, commonly known as IR35. The reforms to the public sector were introduced in April 2017 and extended to the private sector in the 2018 Budget. They will be in force from 6 April 2020 and these reforms will affect the public sector, but only medium and large sized businesses outside of the public sector and do not apply to the self-employed.
Where the rules apply the organisation, agency or third party paying the worker’s company will need to deduct income tax and national insurance contributions (NICs) and pay the employer’s NICs.
Where the individual works for a medium or large sized engager outside of the public sector, through their own personal service company (PSC) and fall within these rules:
- The party paying the worker’s PSC (the fee-payer) is treated as an employer for the purposes of income tax and class 1 NICs
- The amount paid to the worker’s intermediary for the worker’s services is deemed to be a payment of employment income, or of earnings for class 1 (NICs) for that worker
- The party paying the worker’s intermediary (the fee-payer) is liable for secondary class 1 NICs and must deduct tax and NICs from the payments they make to the worker’s intermediary in respect of the services of the worker
- The person deemed to be the employer for tax purposes is obliged to remit payments to HMRC and to send HMRC information about the payments using real time information (RTI)
Small business exemption
As the legislation only applies to medium and large businesses outside of the public sector, those companies that are small do not have to apply the rules. So, the PSC will continue to assess their own status and be liable for their tax deductions, where appropriate.
Small businesses are identified by the audit threshold tests:
- Turnover – not more than £10.2 million
- Balance sheet total – not more than 5.1 million
- Number of employees – not more than 50
Assessment is made to the financial period ending in the previous tax year. For companies, joint ventures and LLPs this will be the period ended pre 6 April 2020 for the 2020/21 tax year. For individuals and partnerships running tax year basis, they will assess using their 2019/20 turnover for the 2020/21 tax year.
A note on individuals – individuals must only consider whether they should assess where they are taking on contractors as part of their business. If services are performed in a personal capacity for an individual, this need not be considered.
Any business identified as small using the above guidance will still be required to assess if it is the subsidiary of a large or medium sized parent. If the ultimate parent company is not small under the above individual business definition, then all of its subsidiaries will not qualify as small.
Additionally, where the parent company is small, but using the aggregated group accounts for the previous financial year, the group exceeds the small threshold, then the parent will be considered not small for these purposes and all group members subject to this legislation.
The aggregate rules apply where two or more of the following qualifying conditions are met:
- Aggregate turnover – not more than £10.2 million net (or £12.2 million gross)
- Aggregate balance sheet total – not more than £5.1 million net (or £6.1 million gross)
- Aggregate number of employees – not more than 50
Client-led disagreement process
The new disagreement process provides for a 45 day period, beginning with the day the challenge is made, where the client must either:
- Inform the worker or deemed employer that they believe, after consideration, that the conclusion is correct, or
- Give the worker and the deemed employer a new status determination statement (SDS), withdrawing the first one
The client must also give the reasoning for deciding that the conclusion is correct after it has been challenged.
If a new SDS is given, it is treated as having been given to the deemed employer by the person immediately above the deemed employer in the chain. In the event that the client fails to:
- comply with the 45 day rule; or
- a) or b) above; or
- fails to provide the reasoning
Then the client will take the place of the fee-payer.
So, the liability to deduct the payments for tax are effectively transferred from the fee-payer to the client if the client defaults. This is a critical point because the client could very easily find themselves in default for an admin error.
HMRC will be publishing detailed guidance for organisations and both general and targeted education packages, including webinars, workshops and one-to-one sessions with businesses in particular sectors.
Enhancements will be made to Check Employment Status for tax (CEST) and tested by legal and operational experts and stakeholders and will be available later in 2019. This date is now earlier than HMRC originally suggested, so let’s hope it is available before April 2020.
Addressing some of the key concerns, the Government has confirmed that the reform is not retrospective. HMRC will be focusing on ensuring businesses comply with the reform for new engagements, rather than focusing on past cases. HMRC have also confirmed that they will not carry out targeted campaigns into previous years when individuals start paying employment taxes under IR35 for the first time. So, an organisation’s decisions about whether workers are within the rules will not automatically trigger an enquiry into earlier years.
The 5% allowance
This is currently available to those who apply the off-payroll working rules to reflect the costs of administration. However, it will be removed for engagements with medium and large organisations. It will continue to be available for engagements with small organisations.
The pension contributions that were mooted in the consultation document have not been included.
If the lobbyists do not succeed, then these reforms will be in force from April 2020. Businesses that qualify will need to start taking action now by carrying out employment status audits and putting in admin systems. It is also worth considering outsourcing the whole or part of the process to alleviate the admin burden and taking out insurance and indemnifications. Given the right approach and some forethought in the planning, it is perfectly possible to maintain a flexible workforce that is outside of IR35.