IR35 - Private sector update
New rules for IR35 in the private sector come into force April 2020. For those not aware IR35 is the the legislation designed to deal “off payroll” working, whereby individuals are working for end clients on a self employed basis, when in reality the relationship that exists is more of an employed nature. This is often done through PSC’s or personal service companies.
Think of a company, owned and run by one individual, whereby the only work that individual does, whether self employed or through their own company, is for either one, or even a handful of clients, on long term engagements. On such engagements it may be the individual has to work set hours, perhaps wear uniform and can’t send a substitute. Yet by operating and trading through a PSC, that person is paying less in tax as it can deduct expenses from the gross income, and also making National Insurance savings, although at the expense of usual employment rights.
From 6th April, new legislation will mean that the responsibility in the private sector for determining whether such a relationship exists between the worker and the end client, will fall with the end client, not the individual/PSC — this means that any tax and penalties that should have been collected by not correctly identifying the working relationship will be brought to the end user. As such many bigger companies are moving away from long term engagement on a self employed basis with individuals if they believe them to fall “Inside” IR35. They are presenting the workers with essentially two options.
1. To become an employee of the end user. This will give them employment rights, but will also mean that they are paid net of tax and NI and that the end user will have to deduct employers National Insurance.
2. Continue to operate their PSC, but through an intermediary, often referred to as an umbrella. The intermediary contracts the PSC, and then contracts them out to the end client. The End Client the pays the gross amount due for services performed to the intermediary, who must then stop tax and NI at personal income tax rates, before paying the balance to the PSC. In this scenario it is the intermediaries responsibility to make the correct deductions.
The PSC receives the NET amount, but this can be withdrawn by the owner of the PSC with no further income tax implications, as it has already been taxed.
Again note this really only effects individuals and companies who are engaged in long term work with an end client which could be deemed as an employed relationship. Any such individuals should contact us for further guidance.
Additionally any End Client, currently contracting their services to PSC’s wanting further help and guidance on the new IR35 regulations should contact us too as we have access to several useful tools including status checkers and umbrella company guidelines as well as access to IR35 specialists.