The Government has published final proposals for reforming the off-payroll working rules from April 2020.
The draft clauses for Finance Bill 2019-20 included legislation for reforming the off-payroll working (IR35) rules. From 6 April 2020, large and medium sized organisations in the private and voluntary sectors must determine whether engagements they enter into with contractors (i.e. where they are the client) fall within the IR35 regime. Where the client determines that IR35 applies, the party that makes payments to the contractor (i.e. the client or another party where the contractor is engaged through an agency) will be responsible for operating PAYE/NIC on payments to the worker’s personal service company. Certain reforms will also be made to the existing IR35 regime in the public sector to bring it into line with the new regime for the private and voluntary sectors.
Scope of the reforms
The reforms will apply to public sector bodies and large and medium sized clients in the private and voluntary sectors.
The Companies Act 2006 definition will determine whether an incorporated organisation is large or medium sized, and unincorporated organisations will be included unless considered ‘small’ (i.e. if their turnover does not exceed £10.2 million over a calendar year).
Clients will fall within the scope of the new regime from 6 April 2020, or with effect from the start of the first tax year following the filing date at which they cease to qualify as ‘small’.
The existing IR35 rules will continue to apply where the client organisation is ‘small’.
Clients will be required to provide an IR35 status determination for the engagement, together with supporting reasons to both the first party they contract with in the labour supply chain (which will pass this down the chain to the fee-paying entity) and the worker.
Interestingly, the Government proposes that the client will be liable for the relevant PAYE and NIC until it has provided the status determination.
Whilst there is no timescale for the fee-payer or worker to challenge the determination, if and when this does happen the client must respond within 45 days.
HMRC will publish guidance on how clients can take ‘reasonable care’ to arrive at status determinations and how the status dispute process could operate.
The Government intends to legislate such that the liability for any unpaid PAYE and NIC transfers to the party in the supply chain closest to the client and, if necessary, ultimately to the client itself.
However, the Government recognises that in certain circumstances (e.g. in the event of a genuine business failure in the supply chain) it would not be appropriate for HMRC to pursue unpaid liabilities in this manner. HMRC will issue guidance on this to clarify what steps clients need to take to demonstrate that they have exercised ‘reasonable care’.
HMRC will issue further guidance on the new regime in the coming months and roll out targeted communications to raise awareness.
Information provided by HMRC confirms that an enhanced online Check Employment Status Tool will be made available before the end of 2019.
However, at this stage it is unclear what changes will be made, particularly in terms of addressing points arising in recent cases that have come before the courts in which taxpayers have been successful in arguing that IR35 does not apply.
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