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Are your clients ready for IR35 changes?

17 January 2020: changes to off-payroll worker rules take effect next spring. Practitioners need to be ready with timely advice. Find out how your clients could be affected by the changes.

Following rule changes due to take effect in April 2020, larger private sector companies which use contract workers operating through their own personal service companies (PSC) will become responsible for establishing the tax status of contracts agreed with those workers. The reforms, based on those introduced in the public sector in April 2017, are designed to prevent "disguised employment" among contractors.

Anita Monteith, technical lead and senior policy adviser in ICAEW’s Tax Faculty, says: “Engagers will have to assess whether the contract looks more like employment than self-employment. If it looks like employment then employment taxes will be due on the contract fee, regardless of the PSC".

The new rules will apply to payments made after 5 April 2020, regardless of the contract date or when the work was performed. 

Who will be impacted by the changes?

The changes will affect all private sector engagers, other than small companies as defined by the Companies Act 2006, and will also modify the existing public sector rules.

The engager will assess the tax status of each contract and will have to issue a Status Determination Statement, giving reasons for their decision.

Payments made for contracts that would be classified as "employment" were it not for the personal service company must have PAYE and National Insurance contributions deducted and remitted to HMRC, along with employers’ NICs. These workers will then be seen as "deemed" workers for tax purposes only: they will not necessarily have legal employment rights.

How will the new rules work in practice?

Large and medium engagers should be putting processes in place to ensure the necessary contracts are reviewed, the reviews are documented, workers informed and payment processes made ready.

Many businesses are using HMRC’s Check Employment Status for Tax (CEST) tool to determine the status of contracts. However, this can be a blunt instrument as it does not currently consider other factors, such as how many other clients the contractor has.

If the fee has to be paid through a payroll, the information needs to be included in time for RTI reporting. If the client is using an existing payroll, contract employees without legal employee status will need to be identified using a new deemed employee marker. The alternative would be to use a separate payroll for deemed employees.