In the world of high-growth enterprises, particularly in the various technology sectors, there is a need for agile and flexible access to some reasonably abstruse skill-sets. This sort of need is often met by the use of contractors or consultants providing their knowledge – often the only asset of the company through which they operate – on a task-by-task basis.
Some imminent tax changes are imposing a potential threat to this way of operating. The tax rules known colloquially as “IR35” have been around since 1999, and – for those operating in this space – are probably well known. They impose a PAYE-style tax charge on fees paid to a Personal Service Company (PSC) where a set of criteria, established by decades of case law, would indicate that the relationship is one of “disguised employment”. It is often a very grey area as to whether or not a particular engagement falls within the IR35 regime, and, until recently, it was the responsibility of the PSC to make this assessment and decide whether or not IR35 applied. Anecdotally, it is probably not ridiculous to reach the conclusion that many contractors and consultants making use of PSCs might have, over the years, taken a rose-tinted view of the applicability of IR35. The Treasury has translated this into a belief that tax was being avoided, and possibly evaded, and legislation needed to change to correct the situation.
The first change kicked in on 6th April 2017, and, probably because of some high-profile cases involving BBC TV presenters, targeted publicly funded organisations engaging PSCs. The effect of this new “IR35 on Steroids” was to force the ultimate client (e.g. NHS, BBC, local and national government) to make the assessment as to whether IR35 applied or not, and also to take responsibility for collecting and paying the tax to HMRC. From the standpoint of (say) a hard-pressed NHS Trust CEO, this was one burden too many, and most NHS trusts simply took the view that this new legislation applied to all their contractors, and started deducting the tax.
HMRC must have been very pleased with the outcome, as they are now rolling out this approach to the private sector. Assuming we don’t have any more last-minute changes of Chancellor, or indeed of direction, between now and 11th March when the Budget is scheduled, this change will take place on 6th April 2020. Where the end client is “Small” (only one breach allowed from: turnover not above £10.2m, balance sheet total not above £5.1m, employees not above 50) it is not affected by the new rules. However, Large and Medium-sized companies will, going forward, be subject to the same regime as companies in the public sector.
If the new rules apply, it is the end client (and possibly any agency in the chain) which is at risk. The end client must make the assessment, and it must collect and pay over the tax. If this is not done, and HMRC are able to establish that it should have been, then they can penalise the end client most harshly.
If you are unsure whether your organisation will be affected by the new rules, please contact us at Richardsons.