UK: Tax Changes Are Coming For Independent Contractors – How Can Your Business Prepare?

Last Updated: 8 October 2019
Article by Neil Maclean, Douglas Sinclair and Elouisa Crichton

Following the introduction of changes to the public sector IR35 rules that apply to consultants providing services through a personal services company, similar rules are due to come into force for the private sector in April 2020. Businesses need to start thinking now about auditing their workforce and ensuring that appropriate indemnities and warranties are in place in contractual arrangements.

What is IR35?

The IR35 rules, or Intermediaries Legislation, aim to remove the tax advantages of providing services via a limited company for individuals who are not truly in business on their own account. These rules mean that if an individual is acting like the employee of a business, but has formed their own limited company (a 'personal service company' or PSC) and used this PSC to provide services to the business, then the PSC needs to operate PAYE on payments made to the individual, in addition to paying employers' NICs. If an individual contracts through a PSC but would be legitimately treated as self-employed if they were directly engaged by the client, then the rules will not apply.

What changes happened in April 2017?

While the IR35 rules in theory could apply to many PSCs, the number of PSCs that assess they need to operate PAYE and pay NICs is low, and HMRC is clearly of the view that it is too low. Consequently, in April 2017 the UK Government introduced new rules for public sector bodies contracting with individuals through PSCs that put the onus for determining employment status and paying payroll taxes on the end client (i.e. the public body) rather than the contractor's PSC. Anecdotally, this has led to a significant increase in the number of cases where the rules are being applied. The rules are now being extended to private sector businesses from April 2020.

As the potential penalties for non-compliance are very high, with HMRC able to go back four or six years to recover unpaid additional income tax and NICs, and charging interest and a percentage penalty on top of this, this could have a major impact.

Who is affected?

Many businesses that engage individuals through PSCs are potentially affected by these new rules.

There is an exemption for 'small' companies, which means a business which, in a 12-month period, meets two or more of the following criteria:

  • Turnover – not more than £10.2million
  • Balance sheet total – not more than £5.1million
  • Number of employees – no more than 50

Unincorporated organisations must operate the off-payroll working rules if their turnover exceeds £10.2million in the previous calendar year.

It is worth noting that if an intermediary agency is involved, they will be responsible for operating PAYE before funds are paid to the PSC, rather than this being the responsibility of the end client. This reduces complexity for the end client, but may still result in increased costs if the agency looks to pass PAYE costs on to the client.

Given the potential scale of the changes we recommend checking the status of individuals providing services through PSCs, and preparing for the new rules, sooner rather than later.

How can we determine whether someone would be an employee or self-employed?

Employment status can be complex, as recent decisions with Uber, Deliveroo, and other 'gig economy' companies have shown. Amidst ongoing confusion among the 'contractor'/'self-employed', 'worker', and 'employee' statuses of individuals undertaking work, tax elements can add further complexity. In HMRC's eyes, the three strands of individual recognised by employment lawyers distil to two: those working under a 'contract of service' (employees) or a 'contract for services' (workers/self-employed individuals). Employees have tax deducted before receiving payment, while self-employed individuals must account for their own tax. There are also major differences in which NICs are payable.

As with the employment tribunals, the tax tribunal will look at a variety of factors to determine the status of the individual, of which the provisions of the contract form only one piece. HMRC has produced a Check Employment Status Test, which can be a useful starting point for those determining employment status; however, this test has been overturned in an IR35 tribunal and described as "irrelevant" by a HMRC official, so further points should be taken into account.

Factors to consider include:

  • Mutuality of obligations – does the client have to provide work, and does the individual have to accept work if offered? Can the individual send a suitably qualified substitute to do the work instead of doing it themselves?
  • Control – how much autonomy does the individual have in terms of decision-making about their work? Who decides what work is done, how it is done, where it is done, and when it is done?
  • Contractual rights to sick/holiday pay – the Tribunal has found in some cases that the absence of worker rights from contracts could point towards self-employment. (Although it is noteworthy that in other cases, differently-constituted Tribunals have found this to be irrelevant as you would not expect these rights to be found in contracts between companies.)
  • In business on own account – is the individual offering their services to the world at large, and do they provide services to other clients? In addition, do they bear the burden of financial risk, and expenses/equipment?

There is an obligation on the client to determine whether or not IR35 applies and provide this determination to the person it is contracting with on entering the contract or (if later) before the services are performed. If asked within 31 days, they must also answer questions about the reasons for this determination. If they have failed to comply with the information obligations or to take reasonable care in coming to the conclusion, then where there is an agency involved the client rather than the agency will take on the obligation to operate PAYE.

If the Check Employment Status Test is used, HMRC will stand by the result given unless a compliance check finds the information provided is inaccurate; or if it finds that the result has been achieved through a contrived arrangement designed to obtain a particular outcome from the service.

If there are any disagreements about a determination from an individual, clients will need to respond using a robust "status disagreement process". Failure to respond within 45 days to a contractor's query will make the client itself liable for the tax and NIC under dispute. HMRC has stated that it will provide guidance in relation to how clients can take reasonable care, and what a status disagreement process should look like, but given how soon the deadline is for application of the new rules, businesses should start thinking now about what their process will look like.

What do I need to do now?

In advance of the rules coming into force, businesses are strongly advised to carry out an audit of their arrangements with contractors to assess whether any of them could be deemed employees under the IR35 rules. You should identify current engagements and contracting terms, and decide the process for making a determination of whether IR35 applies.

If there is a risk that this is the case, then businesses should be engaging with contractors to make them aware of the changes to come, and ensuring their payroll teams are prepared. Given the tax advantages associated with operating as a contractor rather than an employee, in some cases it may be appropriate to review how work is undertaken in practice, and consider whether project-based fixed prices may be a way to give contractors more autonomy. Some businesses may wish to introduce an intermediary agency into the contractual chain, to avoid the administration associated with operating PAYE.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions