Guest blog by Caroline Colliston of DWF LLP
Do you provide your services or engage with consultants via a personal service company? This type of arrangement is dealt with via tax rules that apply to intermediaries also known as IR35.
Draft legislation has been published which changes the operation of IR35 for all public sector clients and private sector companies (including the third/charity sector) that meet two or more of the following conditions:
- an annual turnover of more than £10.2 million;
- a balance sheet total of more than £5.1 million; and/or
- more than 50 employees.
The changes are expected to apply to contractual payments made on or after 6 April 2020.
All parties to labour supply chains will need to be aware of their obligations under this new legislation.
The effect of the changes is to shift the burden of assessing whether the payroll legislation applies to the engaging entity/end client rather than solely relying on the intermediary or personal service company to deal with its own tax.
It is worth noting that even if the end-client is not the actual fee payer, it might still be liable for payroll deductions if the fee payer defaults in its obligations to account for payroll taxes.
Some key changes – to be aware of:
- Initial burden on end-client – ‘unless and until’ the end-client provides the person engaged with a ‘status determination statement’, the end-client will be treated as the ‘deemed employer’ and responsible for operating PAYE in respect of the off-payroll arrangements.
- Provision of ‘status determination statement’ – each engagement requires to be reviewed on its own facts and circumstances. The end-client is required to provide a statement of its conclusion as to whether the arrangements constitute employment for income tax purposes and explain the reasons for the decision. This decision should be passed to the person engaged and the person or organisation(s) the end-client contracts with.
- Client-led status disagreement process – A worker (or the entity which has the responsibility for operating PAYE e.g. an agency) can make representations to the end-client regarding the conclusion reached in any ‘status determination statement’. There are statutory deadlines for responding and failing to meet these deadlines can result in responsibility for operating PAYE not passing down the labour supply chain to the fee payer.
The key takeaway is wherever you sit in the labour supply chain, the onus is now on you to take action to ensure that you know where the burden and risk of operating PAYE on any payments under off-payroll arrangements (and the risk of penalties and interest for non-compliance) sits in your labour supply chain.
Contract review is essential and amendments may be required to include indemnity protection and obligations to share information.
It is advisable for business to establish a status disagreement process and for those contracting with businesses to understand how that will operate.
Robust internal processes for onboarding contractors and assessment of tax status (and audit of the same) will be required.
If you would like to discuss how we can help your business prepare for the impending changes to IR35, please do not hesitate to contact: Caroline Colliston, Corporate Tax Partner, and DWF LLP.
Partner, Corporate Tax
T 0131 474 2333
M 07841 843 744
Disclaimer: The above is a general overview only and does not constitute legal advice.