In recent years, an increasing number of workers have started operating as contractors through personal service companies (PSCs) and therefore becoming potentially subject to the IR35 rules.
This is an area that HMRC claim to be losing significant tax due to individuals using a limited company to carry out professional services but working in a manner more like an employee. The IR35 legislation was introduced to tackle this lost tax and remove the advantages of operating through a limited company and ensure that contractors pay the same tax and national insurance as an equivalent employee. However, despite changes to the legislation over the years since it was first introduced, HMRC claim that too many contractors are continuing to operate outside of the rules.
Changes were therefore made in 2017 in relation to the public sector which will now also be rolled out to the private sector from April 2020. The new rules mean that the contracting businesses, and not the contractors themselves, will be responsible for determining the employment status of their contractors.
Where a contractor is deemed to be inside the IR35 legislation, from April 2020 the business must deduct employee’s national insurance contributions and income tax from the contractor’s pay as well as paying employer’s national insurance contributions. Only small businesses will be excluded from the new rules and will therefore continue to operate as before, where the contractor was responsible for determining their status.
To qualify as a small business, the Companies Act 2006 definition is applied, which means meeting two or more of the following:-
In light of the new rules, HMRC recently launched an updated and improved Check for Employment Status for Tax (CEST) tool on their website and should be used to determine whether a contractor should be classed as employed or self-employed for tax purposes in line with the IR35 legislation. Obtaining and retaining confirmation from the tool of the status of the contractor is recommend for businesses who are required to confirm the status of their contractors, as it provides evidence for any future enquiry and is considered taking reasonable care.
If you have any questions about how your business may be affected please contact us.