With less than six months left until the introduction of the IR35 regulations in the private sector, HM Revenue & Customs (HMRC) has finally released additional guidance to help clarify this complex area of taxation.
From 6 April 2020, the off-payroll rules (IR35) are going to be extended across the private sector bringing large and medium-sized companies under the regulatory framework that is currently in place in the public sector.
IR35 covers two sets of tax legislation that are designed to combat tax avoidance by workers and the firms hiring them.
It aims to prevent individuals from supplying their services to clients via an intermediary, such as a limited company, in circumstance in which they would be employees if the intermediary were not used.
These are defined as ‘deemed employees’ by HMRC and if caught within the rules of IR35 they are required to pay income tax and National Insurance Contributions (NICs) as if they were employed.
As a result, IR35 can reduce a worker’s net income by up to 25 per cent, as well as making it harder for them to move freely between contracts.
Under the latest changes, it will be the responsibility of the engaging business to decide the employment status of a contractor who supplies their services via a personal services company (PSC).
One key development from HMRC’s latest off-payroll rules update, which sets out the approach to the operation and enforcement of the new regulations, is that the new rules can only be applied retrospectively in cases of suspected fraud or criminal behaviour.
The Association of Taxation Technicians (ATT) has welcomed the move saying that it removes any ambiguity in regards to whether HMRC could use a change of status as a reason to enquire into a contractor’s tax affairs from previous years.
In its recent publication, HMRC also announced that it would launch an enhanced version of the check employment status for tax (CEST) tool before the end of the year, following criticism of its existing system.
Introduced in 2017 to assist with the determination of employment status, and therefore a person’s tax treatment, the CEST requires users to complete a set of step-by-step questions.
However, subsequent legal cases regarding status have led to questions about CEST’s effectiveness after it was shown to conflict with the Courts’ rulings. CEST has only proven to be accurate in 85 per cent of cases and HMRC has conceded that a minority of employment cases can be less straightforward and require one-to-one support from specialist advisers.
HMRC has estimated that only one in 10 people, outside of the public sector, who should be paying tax under the current off-payroll working rules are doing so correctly and it believes that the IR35 reforms will raise an additional £3 billion in tax over the next four years.
Mike Bagg, Tax Partner at Milsted Langdon said: “IR35 is a considerable change to the affairs of contractors and the businesses that employ their services. In the public sector, it has been met with great controversy and has resulted in several battles in the Courts to determine workers’ status and their tax treatment, which has further complicated the rules.
“It is essential that contractors and the businesses that use their services seek professional advice as soon as they can, so that they are properly prepared for the changes in April.”