If you currently engage with contractors working via Personal Service Companies, big changes are now coming into effect and this will massively affect the way you work.
So what’s actually changing?
The government has announced it is postponing the reforms to the off-payroll working rules (IR35) from April 2020 to 6 April 2021. This is a deferral of the introduction of the reforms, not a cancellation. The government remains committed to introducing this policy to ensure that people working like employees, but through their own limited company, pay broadly the same tax as individuals who are employed directly.
The policy will be introduced on 6 April 2021 representing a 12-month delay.
This deferral has been announced in response to the ongoing spread of Coronavirus (COVID-19), to help businesses and individuals deal with the economic impacts of the pandemic.
1. Getting it right from 6 April 2021
The off-payroll working rules do not introduce a new tax. They are designed to ensure individuals working like employees but through their own personal service company (PSC), pay broadly the same income tax and National Insurance Contributions (NICs) as individuals who are directly employed. These rules are commonly known as ‘IR35’.
There are some important changes to these rules taking place from 6 April 2021. These changes will apply to all payments made for services provided on or after 6th April 2021.
2. Not investigating previous off-payroll working arrangements
HMRC will not use information resulting from changes to the off-payroll working rules to open a new compliance check into personal service companies (PSC) for tax years prior to 6 April 2021, unless there is reason to suspect fraud or criminal behaviour. This is set out in HMRC’s own guidance.
3. How you pay tax is changing
If you contract for a medium or large sized business or third sector organisation:
Your client will be responsible for deciding your employment status for tax for the services you provide them. They will need to provide you with a ‘Status Determination Statement’ if the rules apply, setting out their decision and the reasons behind it. If the rules apply the client, or the agency who pays your fees, will also be responsible for deducting income tax and NICs before they pay you.
If you contract for a public authority:
Your client is already responsible for determining your employment status for tax and they will continue to be responsible. Now they will need to provide you with a ‘Status Determination Statement’ setting out their decision about whether the off-payroll working rules apply.
If you contract for a small business or small third sector organisation:
You will remain responsible for determining the employment status for tax of your contract, and accounting for and paying the relevant income tax and NICs.
If you are not sure if your client is medium or large, you have the right to request information from them about the size of their organisation.
4. Contractors are not all self-employed
Your employment status, whether you are employed or self-employed, is not a matter of choice. It depends upon the terms and conditions of a particular engagement and your actual working practices. The fact that you supply your services through your own personal service company is not necessarily relevant to whether you are employed or self-employed.
The off-payroll working rules will only apply to individuals who are working like employees under the current employment status tests, and do not apply to the self-employed. For example, if you work predominantly for the same client, at their premises and following their policies and procedures, you cannot send a substitute to work on your behalf and would require permission to seek additional work elsewhere then you are more likely to resemble an employee.
5. The rules do not apply to those that are self-employed
The off-payroll working rules only apply to individuals who are working like employees under the current employment status tests, and do not apply to the self-employed. Individuals who operate their own business structure and do not work in the same way as an employee, for example they have their own business premises, employ other workers or work for a wide range of clients, continue to be outside of the scope of the off-payroll working rules. In these circumstances they will continue to be responsible for paying tax through Corporation Tax Self-Assessment (CTSA) and Income Tax Self-Assessment (ITSA).
6. Clients cannot apply a blanket rule across all contractors
Your client must take reasonable care when making a decision about whether the off-payroll working rules apply. Applying a decision to a group of off-payroll workers with the same role, working practices and contractual terms may be permissible in some circumstances, but it is not right to rule all engagements to be within or outside of the rules irrespective of the contractual terms and actual working arrangements.
7. Disputing a decision
If you disagree with the decision made by your client on your employment status for tax, you will be able to raise your concerns through your client’s status disagreement process. All clients are required to introduce a process from April 2021 to ensure they consider your views if you disagree with their decision.
If, after completing the client’s status disagreement process, a contractor still disagrees with the client’s determination and they consider they have been incorrectly taxed as a result, then existing routine Self-Assessment and National Insurance processes can be followed. HMRC will clearly signpost to these processes in the guidance.
8. Continuing to work through a limited company
These changes do not affect whether you can work through your own limited company, generally known as a personal service company (PSC). This will still be possible after 6 April 2021, however the way the income tax and National Insurance Contributions (NICs) are calculated and paid may change for some contractors.
9. Watch out for off-payroll avoidance schemes
Don’t be tempted by tax avoidance schemes, including those that claim to ensure that you are not affected by the off-payroll working rules or that otherwise offer to increase your take home pay. If something looks too good to be true, it probably is.