IR35 extension to the Private Sector
You may have heard about some important changes that are due to come into force in April 2020 regarding the private sector and a piece of legislation known by some as ‘IR35’ or the ‘Intermediaries Legislation’?!
The original law came into force in the UK in April 2000, it was aimed at combatting tax avoidance by self-employed workers and after fifteen years of IR35 case law and legal precedents this has become a highly complex area of employment and tax law!
Prior to April 2017 the responsibility for determining whether a role was inside or outside of IR35 sat with the contractor or freelancer. In April 2017 the government brought in new legislation knows as the ‘Off Payroll’ rules (sometimes also confusingly known as IR35) which put the onus on determining IR35 status on the end client, where the end client was classed as being part of the public sector. Once the determination is made, if the conclusion is that the role is inside IR35 then the ‘fee payer’ (which could be the end client or could be a recruiter in some instances) will be responsible for accounting for tax and NICs through PAYE including the additional costs of employer’s NICs. From April 2020 these responsibilities will be extended to private sector firms, and with the introduction of the IR35 penalty regime the costs of getting this wrong could be very damaging.
Small Business Exemption
It has been confirmed that ‘small’ businesses would be excluded from the scope and the administrative burden of the new rules, meaning that responsibility for compliance with IR35 will continue to rest with the contractor or freelancer where their client meets the small company criteria. The government has estimated that as a consequence of this exemption 95% of end users will not need to apply the reform, but what is ‘small’ for these purposes?
The draft legislation currently states that a company is small in a tax year in which it satisfies two or more of the following requirements:
• Its annual turnover is not more than £10.2 million.
• Its balance sheet total is not more than £5.1 million.
• It has not more than 50 employees.
In addition, a company is always small for its first financial year.
Anti-avoidance rules apply for joint ventures, group companies and connected persons, to ensure that medium or large companies do not set up ‘small’ arm’s length companies to procure services from contractors or freelancers.
The small business exemption has not escaped criticism with some alleging that the exemption is either inequitable, or problematic commercially and that it may hinder small company growth as organisations attempt to manipulate their figures to stay within the exemption criteria.
Both the Conservatives and Labour have said that they will review the planned IR35 tax reforms if they are in power after the upcoming election. This means that the introduction of private sector IR35 next April is almost certain to be delayed and could be materially amended, throwing more uncertainty into the mix. In the meantime businesses have been advised to continue with their preparations for the introduction of IR35 in April 2020 until such time as they are told otherwise.
If you would like to discuss what the planned IR35 changes may mean for your business, whether the small business exemption maybe applicable for otherwise, please contact Debbie or Becky at Lawpoint or call on 01202 729444.