IR35 changes to off pay-roll working in the private sector

By Richard Gvero, Joint Senior Partner, Head of Commercial and Head of Employment

The Government has recently announced tax-related changes to off pay-roll working in the private sector, governed by the IR35 rules (the UK’s anti-avoidance tax legislation). The changes, due to come into force in April 2020, will bring the IR35 rules in the private sector, in line with the changes introduced in the public sector in 2017.

What is IR35?

IR35 exists to stop the avoidance of income tax where contractors offer services to a company via an intermediary such as a personal service company (PSC). Where those individuals are essentially ‘employees’ of the company in all but name, IR35 allows HMRC to collect additional tax payments from them.

What are the changes?

Currently, the PSC or individual contractor is liable to pay the additional tax. However, due to high levels of non-compliance, from April 2020, IR35 will reverse the tax liability to the company/client or the agency that engages the so-called contractor. The company/client engaging the individual will also be obliged to undertake an employment status audit for tax purposes at the outset.

The impact of the changes

This significant change to IR35 will require businesses engaging contractors via PSC’s to carefully assess the contractor’s employment status at the start of their relationship, and where there is a risk of employee status, ensure that the correct taxes are paid by the fee payer, which will be the company or client where there is a direct relationship with the contractor/PSC, or the agency where one is involved.

Whilst IR35 only concerns employment status for tax purposes, it will inevitably have a knock-on effect on employment law and may lead to tribunal claims from so-called self-employed contractors held to be ‘employees’ for rights they would not otherwise be entitled to, such as holiday pay, unfair dismissal, redundancy pay etc. This is particularly important as tax status rules are not identical to employment status rules. As a result, where an individual is held to be self-employed for tax purposes, they could still be held to be a ‘worker’ or even an ‘employee’ for employment law purposes and entitled to several employment rights.

What do business do now?

For the reasons outlined above, it is essential for businesses that engage contractors via a PSC to put practices in place to fully prepare for the April 2020 changes. It is advisable for those businesses to commence employment status audits and to ensure that all individuals offering services to the business are correctly engaged, to avoid significant tax bills, tribunal exposure and any consequential reputational damage.

Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances