Extending the IR35 reforms into the private sector is expected to raise £1.1bn for the Exchequer in the first year. The changes mean end users will be responsible for determining whether IR35 applies and, in some circumstances, for paying tax and NICs on the sums paid to the intermediary for the worker’s services.
Do the new rules apply to my business?
The rules apply to all private sector companies that meet 2 or more of the following conditions:
- you have an annual turnover of more than £10.2 million
- you have a balance sheet total of more than £5.1 million
- you have more than 50 employees
New rules on determining employment status
The obligation will be on the end user to determine whether the worker providing services through the intermediary would be regarded as its employee for tax purposes if they were engaged directly.
You should use HMRC Check Employment Status for Tax (CEST) tool https://www.gov.uk/guidance/check-employment-status-for-tax to assist in the status determination process. HMRC is not compelled to stand by any result given by CEST, but it has said that it will do so unless a compliance check finds the information provided by firms when using CEST is not accurate.
Having made its determination, the end-user will then need to pass a status determination statement (SDS) to:
- the individual worker; and
- where the worker is supplied through a more complex supply chain and there are other entities between the end user and the intermediary, the entity immediately below the end user in that supply chain.
The statement must say whether the business has concluded that the individual should be treated as its employee for tax purposes or not, and the reasons for that conclusion.
Who bears the tax/NICs liability?
The obligation to deduct and account for tax and pay NICs in accordance with the determination in the SDS will sit with the entity that pays the intermediary for the services provided by the worker (the ‘fee payer’).
Where the end user contracts with the intermediary directly, the end user will also be the fee payer. In a chain of suppliers, the fee payer will be the entity that pays the intermediary.
Can the status determination be disputed?
End users will need to create their own process to resolve any disputes in relation to their status determinations.
Where the conclusion in the SDS is disputed by the worker or the organisation deemed an employer, the firm must respond within 45 days:
- confirming it is satisfied that the SDS is correct, giving reasons for this; or
- withdrawing the SDS and replacing it with a new one with a different determination.
What should we do to prepare?
Identify workers providing services through an intermediary
This may not be immediately evident where the worker is supplied through an agency or other supplier. In such arrangements, organisations may wish to include an obligation to inform them where a worker is providing services through an intermediary, and other information it may require for a status determination.
Making the determination
Determining employment status and providing the SDS in accordance with the legislation should happen before the start of the engagement, or before April 2020 if the arrangements are already in place. End users should consider:
- requesting information from the worker and any other party in the supply chain relevant to making the determination;
- gathering evidence to demonstrate it has taken ‘reasonable care’ in making that determination; and
- recording the supply of the SDS to the worker and any entity between it and the intermediary.
Where an end user decides a worker falls within IR35, it may be necessary to negotiate new terms with the intermediary or any agency or other supplier sitting in between. It may even be necessary to find new contractors where agreement with existing contractors cannot be reached.
Knowing and relying on suppliers
End users will need to carry out appropriate due diligence on any agencies or other suppliers to assess the potential risk of default on fee payer obligations, or other eventualities that could result in a contingent liability passing to the end-user.
Keeping it under review
All parties are likely to want to keep arrangements under review. A material change in the way services are provided during the engagement could result in a change in the status determination and impact the costs that flow from that.
For advice on this tricky area call us today.