Does your business have a contract with a company that provides the personal service of an individual worker? Alternatively, do you operate through a vehicle that could be described as a personal service company? If the answer to either of these questions is yes, or even maybe, then you need to read on.
IR35 & Personal Service Companies
Without turning this into a history lesson, the tax laws known as IR35 were brought into existence in 2000, and were designed to remove the tax benefit of workers providing their services through their own limited companies, to what would otherwise be considered as their employer. These Personal Service Companies “PSCs” received the payment for the services gross (without deduction of PAYE and NICs) from the contractor business, and then like any other trading company, paid corporation tax on the profits. In most cases, the individual service provider then took a low salary but high dividends from the PSC. The result of this being tax savings for both the individual service provider and the contractor business.
As these rules had to be self-assessed by the service provider, from HMRC’s perspective they had only limited success.
A number of high-profile cases involving television celebrities brought this issue into the public domain, and so in an attempt to give the IR35 laws more weight, the government announced that from April 2017 any public body engaging a PSC had to decide if the IR35 rules applied to that company and if so, operate PAYE on the payments to the PSC.
To assist public bodies to decide if the contract is caught by IR35, the government produced an online questionnaire (Check Employment Status for Tax “CEST”) that the service provider can complete giving the public body an indicative answer as to whether or not the rules apply. This online tool has been heavily criticised by tax advisers and the House of Lords as only producing very basic answers, without detailed consideration of the full facts.
The Private Sector
As was widely expected in the budget, the chancellor announced the extension of these rules to the private sector starting in April 2020.
From that date businesses in the private sector will need consider whether or not they need to apply these rules and deduct PAYE and NICs from the payments made to the PSC, and apply employers NIC.
The detailed legislation is expected early in the new year, but thankfully it has been decided that small private sector businesses won’t have to consider these rules when paying a PSC. Note – we are yet to have crystal clear confirmation on what exactly constitutes small.
In the meantime, we would suggest that businesses in the private sector consider their suppliers, and make a list of any company they pay that could be considered to be a PSC. Before April 2020 businesses in the private sector will need to know which suppliers, they have to treat as employees, or consider redrafting the terms of the contract (and the actual working relationship). If that isn’t possible the business may need to consider renegotiating the contract to take account of employers NICs.
For companies that may be considered PSCs, again a contract review is advised to ascertain where your customer may apply these rules. For contracts that are IR35 weak, if a redrafting of the terms of service can’t be achieved, businesses should prepare for customers to want to reduce their rates for employers NICs and consider the tax impact of having PAYE and NIC deducted from their fees.
If you believe your business could be affected by these new rules, please let us know so at the very least we can keep you updated when the legislation becomes available and suggest further practical steps to you.