From 6 April 2020, IR35 risks will transfer to private sector clients who engage the services of individuals (such as freelancers, contractors or consultants) through an intermediary. Whilst such liability currently sits with the intermediary, the tax rules are changing to widen the application of the anti-avoidance rules for the private sector by shifting the compliance burden and investigation risk to the end user or ultimate recipient of contracted services.
The government's response to its public consultation on these rules, together with draft legislation, is expected to be published later this summer. While we wait for the final details to be confirmed, now is a good time to start thinking about the way you engage individuals and perhaps to start reviewing contracts so that you are in the best place to react when the results of the consultation and draft legislation are published.
The rules aim to stop individuals from avoiding employment taxes where they are performing the role of an employee. Historically, individuals were able to contract with an end user via an intermediary, and, by claiming that they were self-employed, they avoided the 13.8% employer's national insurance contributions (NICs). Since 2000, regulations have imposed the employer's national insurance obligations on the intermediary, so the intermediary essentially acts as the employer and bears the PAYE and NICs burden. The rules are complex, particularly when applied to multiple intermediaries in a chain of contracts, and have been burdensome and expensive for industry to comply with. HMRC perceives there to be a 'compliance gap' and has sought to move the burden of complying with the rules from the intermediary to the end client. The public sector experienced this change first in 2017, and next April's change brings the private sector into line with the public sector.
From 6 April 2020, end users will need to determine whether these rules apply and will not be able to depend on a contractor's intermediary getting it right. If your contractors are deemed to be 'employees' under these rules, you will need to operate the PAYE system for those individuals, and will have a liability to account for employer NICs (at 13.8%). If you take the time to consider the new rules and your own structures now, you should be in a good position to cope when the new rules come into force.