IR35 is Changing: Be prepared!
Whilst the changes announced in the first Budget of the new Conservative majority government will have an effect on businesses in our region in the future, it is in fact an announcement made in the previous Budget at the end of 2018 which is going to have a significant impact on some businesses in the coming months. T he changes to ‘off-payroll working’ (more commonly known as the IR35 rules) are being extended to private sector businesses, and will apply to payments for services provided on or after 6 April. This means that if your business engages with sub-contractors who operate through companies, it will now be your responsibility, and not theirs, to determine whether tax and National Insurance should be deducted. The table opposite shows an example of the tax consequences: As you can see from the table on page 33 , the total Tax and National Insurance for an IR35 company is similar to the figure if the individual was employed. However, because they are also responsible for the employer’s National Insurance, the individual sub-contractor is left with a much reduced net earnings figure. End user clients who are small businesses have been excluded from these changes. A business will qualify as a small business if it has either less than 50 employees, turnover below £10.2 million or a balance sheet of less than £5.1 million. There will therefore be a large number of large and medium-sized businesses who will be affected by the new regulations from April 2020.
This new process is a significant change and is likely to increase the administrative burden of engaging sub-contractors who operate through companies. HMRC have updated their own online tool for helping businesses determine whether deductions are necessary. However, there is a lot of scepticism as to whether this tool will be helpful in a large number of cases where contracts between businesses and sub- contractors are not necessarily straightforward.
Under the current IR35 rules, it is the individual’s responsibility to determine whether or not the IR35 rules apply. However, HMRC believe that as many as 90% of the people who should be applying the rules are not doing so. The rules have therefore been amended to push the responsibility of establishing if the IR35 rules apply to the client, i.e. the end user business. If the client believes that the rules are applicable, they need to deduct Income Tax and National Insurance before paying the sub-contractor. If the client fails to do so, they will be liable for interest and penalties on any underpaid amounts.
The IR35 rules have been in place for nearly 20 years and are an attempt to tackle sham self-employments where the sub-contractor has formed a company to avoid being classed as an employee of a customer. The benefits to both the sub-contractor and the customer have been significant tax and especially National Insurance savings. The long standing IR35 rules seek to remove this tax advantage by levying additional tax charges for the sub-contractor.
3 2 | S C R U T T O N B L A N D | T A X
Made with FlippingBook Learn more on our blog