In the October 2018 Budget it was announced that IR35 rules (already established in the public sector to combat employment tax avoidance by off-payroll workers) will be extended to the private sector.
Although the rules – which apply only to medium-sized and larger companies – don’t come into effect until April 2020, their implications warrant immediate consideration.
Samantha Mann, senior policy and research officer at the Chartered Institute of Payroll Professionals (CIPP), says: “Although the private sector guidance hasn’t been rolled out yet, HR directors should be getting as much as possible done now based on what we know of the payroll guidance for the public sector. I am not expecting there will be a significant difference from public sector rules.”
HRDs at private sector firms need to get their payroll systems and processes in order for these changes, and there’s no time like the present. Here’s how to start planning:
So what’s involved?
IR35 prevents Income Tax and NICs being avoided when contractors provide services to firms through intermediary companies, if that contractor is considered effectively an employee in disguise.
It will become the engaging organisation’s responsibility to ensure that relevant contractors are paid via PAYE to prevent such avoidance. They can be considered employed just for tax purposes without receiving additional employment rights.
Contractors must be looked at individually as each case is different. Blanket decisions are not technically permitted, could result in unnecessary taxes being paid, and may dissuade contractors from working for the business.
The roll-out date for the new rules may seem a while away but HR should focus current efforts on putting the necessary processes in place. As Kate Upcraft, director of Kate Upcraft Consultancy, says: “It’s not a software issue. Existing systems should already do everything necessary. But lots of decisions need to be made.”
Is this relevant to my company?
Although small companies are exempt we don’t yet know how ‘small’ will be defined. What we do know is that the government is intending to use criteria similar to the Companies Act 2006, which considers a company small if it satisfies two or more of the following: a turnover no greater than £10.2 million, a balance sheet no greater than £5.1 million, and a workforce of no more than 50.
But, as Upcraft warns, organisations may find themselves moving between two size categories. “Some businesses will suddenly find they grow to become medium-sized and will have to renegotiate with current contractors,” she says. “The first payment after the law changes on April 2020 is what you have to worry about.”
Getting familiar with CEST
Consider whether the government’s online Check Employment Status for Tax (CEST) tool is likely to be the primary method of defining which contractors fall under IR35 rules. While there has been much criticism of the tool from the public sector, HMRC has taken suggested improvements on board and will be working to implement these for private sector use.
It is important to decide who in the organisation will be responsible for CEST or whether assessments will be outsourced. If it is going to be outsourced then contact consultants soon, as suitable expertise will be in short supply nearer the deadline.
Obtaining payroll data
Processes should be set up to collect personal details from contractors who need to be put on payroll to establish their tax code.
Andrew Evans, tax lawyer and partner at law firm Geldards, explains: “The risk for the employing entity is that if it doesn’t have full details it will have to make a high rate of emergency tax, which doesn’t take into account the personal allowance.”
Centralisation and communication
Procurement decisions must no longer be made without the knowledge of a central point of reference who understands the issues and the risks to the business. A central team should also be set up to negotiate with consultants.
“It’s important there is good communication between HR, payroll and whatever teams are involved with making payments to contractors,” says Mann. “We also know from the public sector the importance of good communication with contractors who may be affected by the April 2020 changes.”
