Off payroll working – a taxing situation for contractors next year

Forthcoming changes to the IR35 tax rules mean that clients that engage self-employed contractors could face increased income tax and NI liability from 6 April 2020.

What is IR35?

IR35 rules prevent tax evasion through ‘disguised employment,’ where self-employed people provide their services through an intermediary such as a ‘personal service company’ (PSC) to avoid paying income tax and NI on their earnings. The client pays the PSC for the service, and the contractor gets paid by the PSC in the form of dividends.

The IR35 rules apply if the contractor would be considered an employee of the client for tax purposes if the PSC didn’t exist. Until now, the tax liability has been with the PSC, but will change next year when ‘off-payroll working’ in introduced into the private sector.

How will it work from 2020?

From 6 April 2020 the proposed rules will move responsibility to the client to determine:

  • whether there is ‘deemed employment’ for IR35 purposes, and
  • accounting for income tax and NI if there is deemed employment.

If there is deemed employment between a client and a self-employed contractor, the income tax liability will now fall on the client.

So, if your business uses self-employed people, even if this is through another company, you will be responsible for working out whether IR35 applies. And if it does, you will be responsible for accounting for tax and NI. This is called ‘off payroll working’.

Off payroll working

Off payroll working is not a brand new concept, it has been operating in the public sector since 2017. The Government is currently looking at what changes may be necessary to make it appropriate for the private sector. It looks likely that the new rules will apply to any businesses with 50 or more employees who engage self-employed contractors through a PSC.

If this applies to your business, you’ll face additional tax risks plus an increase in costs and admin.

Whether a contractor is in ‘deemed employment’ will depend on the terms of their contract and the way in which their engagement actually operates. We’ll cover this in next week’s blog…

In the meantime, if you have any queries about IR35, contractor or employment status, or any other tax issue, please click the link below.

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