Julie Duane, Solicitor Advocate at CG Professional.
From April 2020 the private sector needs to be prepared for the IR35 effect. For the first time, private sector end-user clients (hiring organisations) will have to make IR35 status decisions and potentially be exposed to tax liability where those decisions are made incorrectly.
IR35 is tax legislation which has been implemented in order to prevent disguised employees from avoiding tax and is commonly known as off-payroll working.
It is a well-known position that the IR35 legislation has been widely criticised due to its complexity and unfair process. In order to give an indication of how complex the case law is, it is worth noting that HMRC has lost six out of seven IR35 tribunals since 2018 which suggests even the experts in the field are having difficulties with its processes.
In determining IR35 status parties will need to consider the personal service and substitution provision, mutuality of obligation and supervision direction and control. Other factors which parties might want to take into consideration include:
- whether somebody is fully integrated and/or part and parcel of an organisation;
- whether they adopt any financial risk which they would need to indemnify or rectify in their own time;
- whether they use their own equipment to carry out their tasks and duties;
- do they participate in training, team meetings and team-building meetings; and
- do they have access to the car park and access to the staff canteen?
Although clients in the private sector do not currently have any liability, the government wants to extend this provision under the public sector rules to the private sector from April 2020. This is because they believe there is widespread non-compliance with the legislation. They estimate that approximately £440 million in the tax year 2016-2017 went amiss because of IR35 concerns.
It is, therefore, envisioned that responsibility for operating the off-payroll working rules will move from individuals to the organisation, agency or other third party engaging the worker. For those individuals who are directly engaging the worker, they are the ones who are likely to be at risk of liability. The only potential caveat to that is where the organisation is small, then the PSC (Personal Service Company), may have the responsibility to make a status determination and is liable for the tax. Where the client is a medium or large entity it has the responsibility to make status determinations. Ultimately the fee payer will have the tax liability and if services are contracted out, the service provider has a responsibility to make status determinations.
If you have any questions regarding the contents of this article, please do not hesitate to contact a member of the CG Team who will be more than happy to assist.