Taxing times

From April 2020, changes to the ‘IR35’ regulation will impact employers who engage contractors through Personal Service Companies (PSCs). These changes will expose businesses engaging contractors to significant tax risks.

At the moment, where a person provides services to a business through a PSC, income tax and national insurance contributions (NIC) are paid if that person would have been regarded as an employee had they engaged directly with the business.

In the private sector, the PSC is liable (not the employer) to determine whether the IR35 rule applies and if it does apply, they pay HMRC income tax & NIC. The employer contracting with the PSC is not liable for any resulting tax.

From April 2020, the risk will shift from the PSC to the employer. The employer will need to determine whether the IR35 rule applies and then pay income tax and NIC as necessary. HMRC will then be able to monitor employers who contract with PSCs and check for any non-compliance. The amendments will be consistent with changes previously implemented in the public sector.

Although the responsibility for paying income tax and NIC is changing, the employment status tests which should be used to determine whether or not IR35 applies are not thought to be changing.

All businesses that engage contractors and which will fall within the scope of the new rules will need to take steps to ensure they comply. At this stage, affected businesses can still take practical steps to prepare.

These include:

• Engaging with key stakeholders in the business – for example, this may include HR, Tax, Procurement, Finance, the Senior Accounting Officer, and Department Heads
• Identifying potentially affected contractors from across all parts of the business
• Estimating any likely cost increases due to employer’s NIC and Apprenticeship Levy charges arising under IR35, and potential increases in contractors’ rates
• Developing and implementing new systems and processes to ensure compliance.

Early action is recommended to avoid a cliff-edge scenario in April 2020. There are no specific financial penalties attached to a failure to comply with IR35. However, defaulters remain liable for any underpayment of tax until such time as they comply with their obligations and failure to account for appropriate tax also carries a risk of additional penalty.

The content on this page is for general awareness only. It is not intended to constitute professional or legal advice. Changes to legislation may have happened since this article was published. The contents of this article should not be used as a basis for action and the reader should be advised to seek the appropriate professional advice based on their individual circumstances.