30 May 2019
In the last Budget, the Chancellor announced significant changes to the tax rules that apply to individuals engaged to supply their services through their own private companies (often referred to as IR35). These changes come in to force in April 2020 (though small organisations will be exempt). The changes will mirror rules that apply in the public sector and place the onus on the engaging business to ensure HMRC compliance whereas previously the onus was on the individual supplying his/her services through their company.
These changes will fundamentally change the operation of IR35 by making the end client responsible for assessing a consultant’s employment status and applying the correct PAYE withholding.
The correct categorisation of each individual’s employment status is critical because it impacts on their employment rights and the correct taxation of payments made to them. Genuinely self-employed individuals do not benefit from the same rights as employees and workers (such as the right to paid holiday) and payments are taxed in a different way both in terms of national insurance and expenses that can be offset against income.
Organisations can face potentially significant liabilities by incorrectly treating individuals as self-employed rather than employees or workers and/or by misapplying the rules relating to IR35 once these changes are implemented.
This should be viewed in the context of other important developments such as the new offence of failure to prevent the facilitation of tax evasion). In some cases, HMRC may not take the view that use of IR35 does amount to tax evasion.
The difficulty for organisations is that employment status and whether someone can lawfully use IR35 will be assessed on a case-by-case basis taking into account a range of different factors.
Simply using an agreement that describes the arrangement as one that is an IR35 style agreement will not suffice. HMRC will now be able to assess whether but for the IR35 company between relationship between the individual supplying services and the business that has engaged the individual/company, the relationship would be one of employment. In those circumstances, the business engaged should make the normal PAYE deductions that would have applied had the individual been directly employed.
There are potentially significant financial liabilities for organisations that miscategorise individuals as self-employed when they are actually employees or workers. Liability for PAYE deductions rests with the employer and this can mean payments of arrears of tax, national insurances contributions and interest and penalties.
If an individual’s employment status has been categorised wrongly an individual who is a worker could assert a claim for backdated arrears of holiday potentially dating back many years.
HMRC might take enforcement action to recover unpaid PAYE deductions (plus interest and penalties) in respect of any individual who is engaged directly by the organisation and is deemed to be an employee or worker rather than being genuinely self-employed.
Government research indicates that only 10% of individuals providing services through a personal service company are applying the current IR35 rules correctly. This suggests that, under the new rules, there will be enormous scope for end clients to face significant liabilities if they failure to deal with PAYE deductions.
Even before changes to IR35 shift responsibility for applying PAYE withholding to the end client, the corporate offence of “failure to prevent the facilitation of tax evasion” might possibly extend liability to end clients in cases where an individual/their personal service company does not accurately assess their deemed employment status under the IR35 rules.
End clients will have a defence to this if they can show that they had “reasonable prevention procedures” in place to prevent the facilitation of tax evasion.
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