Reform to IR35 Rules – What you need to know

APRIL 2020

The end of the Umbrella Company?

The IR35 rules that were introduced in the year 2000, were intended to ensure that individuals working through an “umbrella company” (either an own company or a third party company), who as a result of the way they work, would have been regarded as employees, if engaged directly by the end user (the “employer”), pay broadly the same income tax and National Insurance contributions (“NICs”) as if they were employed.

In the private sector, it is currently for the umbrella company to determine whether the rules apply and, if so, to account for income tax and NICs accordingly. This means that the tax risk lies with the umbrella company rather than with the employer.

In April 2017, the government amended the IR35 legislation for individuals providing services to a public sector employer through an umbrella company. This reform to IR35 rules meant that the public sector employer, rather than the umbrella company, became responsible for deciding whether IR35 rules applies and, if so, for accounting to HMRC for tax and NICs.

REFORMS IN PRIVATE SECTOR

From April 2020, the public sector reforms will be extended to the private sector. These reforms mean the employer will be responsible for determining whether IR35 applies and, in some circumstances, accounting for tax and NICs on the sums paid to the umbrella company for the worker’s services.

From April 2020, in the private sector the obligation will be on the employer to decide whether or not the worker providing services through the umbrella company would be regarded as its employee for income tax purposes if they were engaged directly by the employer. To make such a determination, the employer will need to consider all aspects of the working arrangements, and not make a decision only based on the documentations that they have in place.

There are tools that are available on the HMRC website that assists employers to determine the status of such employees and having made its determination, the employer should provide 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 employer and the umbrella company (for example one or more agencies), the entity immediately below the employer in that supply chain.

Broadly, the SDS must state whether the employer has concluded that the individual should be treated as its employee for income tax purposes or not, and the reasons for that conclusion.

LIABLITY FOR INCOME TAX/NIC’s

The obligation to deduct and account for income tax and NICs in accordance with the determination in the SDS will be with the employer that pays the umbrella company for the services provided by the worker (“fee payer”).

In certain situations, where the employer contracts with the umbrella company directly, the employer will also be the fee payer. Where there is a chain of suppliers, the fee payer will be the entity that pays the umbrella company.

HOW CAN THE SDS BE DISPUTED?

The employer will need to create its own processes to resolve any disputes in relation to its status determinations. Where the conclusion in the SDS is disputed by the worker, the employer must respond within 45 days either confirming that the SDS is correct with reasons or withdraw the SDS.

HOW CAN ORGANISATIONS PREPARE FOR THE REFORM TO IR35?

The organisations would need to carry out an audit of their existing arrangements with contractors, and to consider how, and to what extent, they are affected by the reforms. The results of such an audit should inform discussions about how affected organisations can plan for the implementation of the new rules from April 2020.

An employer should put in place due diligence to carry out checks and to know when a worker is providing services through an umbrella company. In arrangements with agencies and other suppliers, organisations could include an obligation to inform the employer where a worker is providing services through an umbrella company and other information that it may require to carry out a status determination.

The Employer should have necessary system in place and be in a position to: –

1. Make determination as to the worker’s employment status.
2. Provide reasons for the determination to the worker and the person or organisation contracts with.
3. Retain detailed records of any employment status determination, including the reasons for the decision; and
4. Put in place clear processes to deal with any disagreements that arise from the determination.

EMPLOYERS AFFECTED BY REFORM TO IR35

Until the 6th April 2020, the rules governing IR35 have been applied to the public sector. But from the above date, the rules will also apply to the private sector, including charities. Organisations will be required to meet 2 out of the following 3 conditions:

1. An annual turnover of more than £10.2 million.
2. A balance sheet of more than £5.1 million.
3. More than 50 employees.

Need HELP

It is important for organisations in the private sector to start preparing for the upcoming changes. It is important to assess the status of the employee on a case by case basis and such assessment should be carried out prior to the 6th April 2020 and avoid falling foul of the reform to IR35.

There are several Tier 2 Sponsors (both under General and Intra Company Transfer categories) in the United Kingdom, who are impacted by the new rules and would need clarity and certainty whilst they work hard to grow their business.

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MARSANS can assist employers (including Tier 2 Sponsors) to advise and assist with the implementation of the new requirements. We can also help to improve on the system/processes that you currently have in place.

We can be reached either by telephone on 020 7499 0620 or by email at email@marsans.co.uk. 

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