In an effort to tackle the issue of ‘disguised employment’, the UK rules on working with contractors who provide services through an intermediary are changing.
The government is committed to cracking down on ‘disguised employment’. In order to achieve that, the IR35 rules are changing in April 2020. If you engage contractors (or ‘off-payroll workers’) whether directly or through an agency who are providing their labour through an intermediary such as a personal services company (PSC, that is, a company owned and controlled by the contractor) you need to make changes well ahead of April 2020.
What is IR35 and what is changing?
IR35 applies where a contractor personally provides services via an intermediary (e.g. a PSC) but, if the contractor was engaged directly, he or she would be considered to be your employee or office-holder for tax purposes.
It is currently the responsibility of PSC or intermediary to consider employment status and account for Pay as you Earn (PAYE) and National Insurance contributions (NICs) where necessary. From April 2020 that is changing and, instead, it will be your responsibility to assess employment status and operate PAYE and NICs as appropriate.
For example, if you engage a contractor through a PSC you will need to:
- Assess the employment status of that individual (if you engaged them directly would they be an employee for tax purposes?).
- Notify the contractor of your decision and provide reasons.
- If you determine that the individual would be an employee, you must operate PAYE and NICs on the fee paid excluding VAT (in addition you must continue to pay VAT on the gross fees).
The changes will also apply to more complex labour chains and so an early understanding of your labour supply chain is critical.
What will I need to do before April 2020?
Review and audit your labour supply chain to understand which contractors are using intermediaries and therefore are potentially within IR35.
Decide who will be responsible for implementing the new rules and make sure they are properly trained.
Determine how you will assess the employment status of each off payroll worker to ensure that you have a clear and consistent methodology.
Assess the status of each existing off-payroll worker for whom you may pay fees after March 2020 and start talking to them; you may need to renegotiate the rates you pay those off-payroll workers whom you want to retain.
Amend all existing contracts with off-payroll workers (both those you assess to be employees and those assessed as genuinely self-employed).
Ensure that all new contracts are drafted to anticipate the new rules and develop an on-boarding process that ensures a proper employment status assessment is made before work is started.
Ensure that payroll and accounts payable systems are able to cope with the changes (and you can operate both VAT and PAYE/NICs where appropriate).
Review your policy on whether to conduct Right to Work checks for off-payroll workers.