I’m sure you have already read about the new IR35 rules coming in from April 2020; where except for small companies, an end user that engages contractors through a personal services company will have responsibility for determining whether the contractors should be deemed employed and then making tax and national insurance deductions as appropriate.
How does this affect the not for profit sector?
Academies and colleges have already been applying the rules as they were deemed part of the public sector when the rules were first introduced from April 2019.
From April 2020, all companies, including charities, will need to apply the new IR35 legislation.
Many not for profit organisations rely substantially on Government funding or grants for their expenses. Where these funds and grants have already been agreed, if the new IR35 rules applies such that the charity is required to treat the contractor as employed, then they may suffer the additional cost of the tax without any recourse to a funding body.
It could also mean that the charity suffers tax twice on the service received from the contractor. The contractor will continue to issue invoices to the charity, which will likely have VAT added, but the net amount will be charged through the payroll, subject to payroll and national insurance. The VAT won’t necessarily be reclaimable by the charity.
There is some good news though, HMRC have confirmed that donation income and grant income will not count as turnover for the small threshold test for applying the new rules and therefore many charities will qualify as small and will therefore not be caught by the new legislation.