The public sector ‘IR35’ rules will extend to the private sector from April 2020 – there are practical steps that businesses should take now.
At this year’s Budget, HM Treasury and HM Revenue & Customs (HMRC) published the outcome of their consultation on reforming off-payroll working in the private sector (KPMG’s response to that consultation is available here).
The new regime from April 2020
As expected, the 2017 public sector reforms will be extended to the private sector.
This will see responsibility for determining whether an engagement falls within the ‘IR35’ regime moving from the worker’s Personal Service Company (PSC) to the end user (including where PSCs are engaged via an agency).
Where an employment relationship is deemed to exist, the end user would be responsible for operating PAYE/NIC on payments made to those PSCs if it pays them directly.
Otherwise, the agency would be responsible for applying PAYE/NIC to those payments based on the end user’s ‘IR35’ determination.
These changes will take effect from April 2020 and be limited to large and medium sized enterprises that engage contractors through PSCs.
The current regime will continue for ‘small’ businesses. It is thought that ‘small’ may be defined by reference to the Companies Act (i.e. where two of the following criteria are met: turnover not more than £10.2 million; balance sheet of not more than £5.1 million; and not more than 50 employees).
A further consultation on the new rules is expected in the coming months. This will inform the draft legislation that will be published in summer 2019.
HMRC will also work with stakeholders to improve its online Check Employment Status Tool (CEST), and improve its published guidance prior to April 2020.
We agree that improvements to CEST and HMRC’s guidance are necessary, i.e. so that there is greater clarity on who is and who isn’t caught by ‘IR35’ and the compliance burden on business is thereby reduced. We will continue to raise our concerns with HMRC in this regard.
We understand that the new guidance will address what PSCs should do where they do not agree with their engager’s decision on ‘IR35’ and this will be helpful.
There is also an indication that the consultations will explore ‘options for the consequences of businesses failing to use reasonable care in making their decisions’ – does this mean sanctions for businesses who apply the rules on a ‘blanket’ basis?
What should businesses do now?
Implementation of these changes is later than originally expected.
This deferral is welcome. It should allow HMRC to review the outcome of a full year’s compliance cycle in the public sector and learn from this when implementing the private sector reforms.
It will also allow businesses more time to prepare. Nevertheless, there are practical steps that many businesses can take now, which include:
• Engaging with key stakeholders
• Identifying potentially impacted workers
• Estimating any likely cost increases due to Employers’ NIC and Apprenticeship Levy charges arising under ‘IR35’, and potential changes in contractors’ rates
• Developing and implementing new systems and processes to ensure compliance with the new regime
Our experience of assisting public sector employers to manage similar changes indicates that the timescale involved should not be underestimated.
Such exercises can take several months and involve a number of key stakeholders and work streams.
Businesses should therefore consider identifying a project lead and core team in good time.
How can KPMG help?
KPMG has extensive experience of assessing the application of ‘IR35’ and have advised many organisations in the public sector on implementing the 2017 reforms.
To assist businesses to prepare, we have produced a guide to getting ready for the new regime. Our range of technology solutions can also assist in identifying ‘at risk’ engagements, as well as helping assess future costs and support the retention of key talent.
We will be holding a seminar in London on 5 December (further details on this will be released soon).
If you would like to understand more about the prospective changes to the ‘IR35’ rules in the private sector, the impact they are likely to have on your business, or would like to explore how our technology can support you, please get in touch with your normal contact or email email@example.com.
© 2020 KPMG LLP, a UK limited liability partnership, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.