Some businesses in the hospitality and leisure sectors engage consultants who provide their services through a personal service company. This may, for example, be a property consultant, a strategic development consultant or an HR consultant. The personal service or limited company submits invoices to the hospitality business who is currently not responsible for taxing the individual’s income. On 6 April 2020, the rules on employment taxes for off-payroll workers are changing, with the effect that end users will become responsible for policing their tax.
The rules governing taxation of personal service companies are known as IR35. The rules are designed to ensure that a contractor who works like an employee, but through their own limited company (or personal service company) pays broadly the same tax and NI as employees. The new legislation extends these rules, and shifts the liability for income tax and national insurance contributions to the organisation who engages and pays the company for the worker’s services – e.g the end user in the hospitality and leisure sector.
Responsibility moves to you
This means the responsibility for deciding whether a worker should be taxed as an employee from the individual’s personal service company – or other intermediaries in the labour supply chain – moves to the end user (hospitality business) who pays for the worker’s service. This includes responsibility for deciding whether the rules should apply, and responsibility for deducting the associated employment taxes and national insurance contributions from payments made to the worker.
The new rules apply to large and medium sized companies in the private sector. The definition of a small organisation is highly technical and should be considered carefully.
Failing to carry out the required status determinations for each relevant contractor will result in HMRC holding you liable for any unpaid income tax and national insurance that should have been deducted from the worker’s pay – even if you are not responsible for paying for their services. The significance of wrongly categorising an individual’s employment status could be amplified if they bring an Employment Tribunal claim for backdated payments owed to them as a worker or employee such as unpaid holiday pay.
What do you need to do now?
As things stand, by 6 April you need to have completed the following:
- Carried out an employment tax status determination for each and every engagement within the scope of the new rules
- Provided a copy of the determination to the worker and any other relevant members of the supply chain
- Put in place policies to demonstrate compliance with the new IR35 rules going forwards, including how you will deal with employment status disputes with contractors.
In January the Government announced that it was launching a review of the implementation of the changes to the IR35 rules – the purpose of which is to smooth the implementation of the changes. The Government has said it will engage with affected individuals and businesses, via a series of round tables with stakeholders.
The Government’s review will also look at possible further steps for supporting businesses in assessing an individual’s employment status. While some have suggested that the announcement may indicate a possible postponement to implementation, this has not been confirmed. Indeed, the announcement continues to refer to implementation taking place on the original implementation date.
The conclusion of the review is expected by mid-February 2020.
At present, as the reforms are still due to come into effect on 6 April 2020, it would be prudent for businesses to continue with their preparations for implementation.
The Government has produced very useful guidance to the IR35 changes which includes a link to their “check employment status for tax” service. See HERE
If you need assistance with this, Freeths have extensive experience of advising on the application of the IR35 rules, including the proposed changes, under both tax law and employment law. Talk to us to ensure compliance well ahead of the deadline – some changes may require a significant investment of time and resources and will certainly require changes to payroll.
For further information or advice please contact Christopher Sing
The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.