It was announced in the Autumn Budget 2018 that the off payroll rules in the private sector, otherwise known as IR35, would be brought inline with the rules that currently apply for public sector contracts. These new rules are to be brought in from April 2020 when the engaging businesses will become responsible for assessing an individual’s employment status. The rules will, however, only apply to medium and large business, as defined by the Companies Act 2006.

The new consultation on the off-payroll rules in the private sector was released last week and this document will give some considerable guidance on how the reforms will work in practice. It has been made clear that the consultation outcome will guide not only the new rules in the private sector but will also, reform the rules for the public sector.

The client will remain responsible for determining the contractor’s off payroll status and the actual method of establishing status will not change. If the contractor is outside IR35 before April 2020, they should remain outside afterwards.

The client will need to exercise “reasonable care” when they make their assessment.

This provision was brought in just before the reforms were brought into the public sector. This was to prevent blanket bans on the use of Personal Service Companies.

HMRC have, however, indicated their approval of role based assessments under certain circumstances e.g. assessing groups of contractors by their role rather than individually.

What is new is that the determination and the reasoning for the determination, if requested, must be cascaded down to all parties, specifically the agency, the fee-payer and the off-payroll worker. This is to ensure that the parties in the labour supply chain have sufficient information to allow them to comply withtheir obligations. In order to ensure that the extended information requirements are effective the government also proposes to modify the rules that determine when the liability for income tax and NICs should be transferred.

The government proposes that the liability should initially rest with the party that has failed to fulfil its obligations. So, for example, if an agency failed to send on the determination that agency would be liable for any income tax and NICs due. Similarly, if a fee-payer, having received the determination failed to make deductions from any payments made to the worker’s PSC then it would become liable.

The preferred method of HMRC of establishing status is to use their Check Employment Status for Tax tool, otherwise known as CEST.

https://www.gov.uk/guidance/check-employment-status-for-tax. HMRC have promised to improve the functionality of their CEST tool to ensure it reflects the needs of the larger and more diverse private sector. Clients will also need to review any contracts that are in place as well as the working practices to determine status. The draft legislation should be available in the summer and published in the autumn, so the private sector should have enough time to digest the rules and make them operational.

IR35 is tax legislation that is designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used.

This can save the engaging organisation a significant amount of cash as they no longer have to pay employers’ NICs, and it also means they do not have to offer any employment rights or benefits.

Such workers are also called ‘disguised employees’ by HMRC.

A common example is the ‘Friday to Monday’ phenomenon. That is when an employee leaves employment with their employer on a Friday only to return to the same role in the same office on the Monday, only engaged as a contractor or Locum or consultant trading through a personal services company or as self-employed and paying much less tax.

The IR35 rules came into law in 2000. Up until now the onus was on the individuals, such as IT contractors or locums, to decide whether the rules applied to them.

From April 2017, it had become the responsibility of the end client (who are deemed to be public bodies for the purposes of this legislation) to decide whether the IR35 rules apply to the locums they engage, even those engaged via an agency

When a Contractor or locum provides services to a end client through their own limited company, also known as a personal service company (PSC), the client will need to check whether the rules apply.

This would be done through the payroll system by essentially setting the locum up as a new category of employee called an 'off payroll worker' which does not come with the same rights as an employee or through an umbrella company.

If a contractor or locum falls within the legislation then the practice must deduct 32% from the payment to the PSC and pay that to HMRC - this comprises basic rate tax at 20%, plus employee’s National Insurance contributions (NICs) at 12%. The practice must also pay any employer’s NICs 13.8% to HMRC.

How do practices find out if the rules apply?

HMRC has published an online toolkit, the Employment Status Service (ESS) which provides guidance on each case and has stated that it will stand by the response generated, unless the information provided was inaccurate. HMRC has warned that where information is manipulated to affect the outcome, it will be treated as evidence of deliberate non-compliance, which will attract a higher penalty.

Practices should answer the questions generated by the toolkit, print a copy and keep it on file so they can produce evidence in the future if required.

As an additional safeguard, they might also consider putting legal contracts in place with locums to ensure that information provided is correct.

Clearcut Accounting is offering bespoke advice on IR35 to IT Contractors and Locums which include guidance on legal contracts and review on the contracts for IR35 purposes.

We are also offering umbrella company solutions if any of the IT contractor or locum doctor is subject to IR35 and provide off payroll solution through our Umbrella companies “ITPAY LTD & WELLPAY UMBRELLA LTD"< /p>