Next year off-payroll working rules (IR35) will change, which will impact private sector businesses, public organisations, recruiters and individuals providing services via a personal service company (PSC), but are they ready?

IR35 was designed to make sure that an individual who works like an employee, but through an intermediary such as their own limited company (a PSC), pays broadly the same Income Tax and National Insurance contributions as other employees. This does not extend to the self-employed.

Following scandals surrounding payments made to BBC presenters and some NHS contractors IR35 hit the headlines and changes were made to the legislation for public sector organisations from April 2017. In a nutshell the changes switched the burden of complying with IR35 from the PSC to the user of the worker’s services including responsibility for deciding whether the rules should apply. Responsibility for deducting the associated employment taxes and National Insurance contributions now rests with the entity paying the PSC, either the end user of the services or a third party such as an agency.

Following consultation in Spring 2019, the Government published draft legislation for extending the new rules to the private sector from April 2020. The proposed legislation extends the rules to medium or large-sized organisations in the private and third sectors.

Currently around 60,000 organisations engage individuals through PSCs and an estimated 170,000 individuals supply their services in engagements that are perhaps more akin to employment – highlighting the scale of impact that these changes will have. Around 20,000 recruitment agencies and other intermediaries also supply staff through PSCs.

So, what will these new rules actually mean for those affected?

From 6 April 2020, medium and large organisations outside the public sector will need to decide if the rules apply to an engagement with individuals who work through an intermediary – highlighting an administration burden on businesses. This also includes arrangements where the worker is sourced via a third party such as a recruitment agency. A status determination statement setting out their decision is then needed to outline the reasons for that conclusion. These status determinations will now also need to be provided by public sector organisations – extending their administration burden - and all parties in the labour supply chain need to pass on and be aware of the end user’s status decision and reasons for it.

Where the rules apply, the organisation, agency, or other third party paying the worker’s PSC will need to deduct PAYE and employee NICs and pay employer NICs and (where applicable) the apprenticeship levy demonstrating additional financial pressure.

Organisations will need to undertake due diligence of their worker supply chain as there are provisions to transfer PAYE and NIC liabilities along the chain where there has been non-compliance with the rules and where it is not possible to recover those liabilities from the non-compliant entity. However, it is understood these provisions are not intended to operate where there is no deliberate tax avoidance.

Employment status is notoriously difficult to decide and HMRC’s Check Employment Status for Tax (CEST) service has been heavily criticised. However, work is ongoing to improve the tool and further guidance is to be issued soon. But the new rules include a statutory, client-led status disagreement process which will allow individuals and fee-payers to challenge the organisation’s determinations.

There is some good news. The existing rules which require PSCs to determine their own status will continue to apply where the end user is classified as small. This is broadly based around the Companies Act 2006 definition and is expected to include around 1.5m organisations. Where a small organisation ceases to be small, it does not immediately fall into the new rules but as with all complex legislation, advice should be taken in these circumstances.

Many organisations will require assistance from legal and tax advisers in implementing the new rules and current contracts will require review. Law firms can also be users of contractors in these circumstances and need to consider their own labour supply chains. But April 2020 is not far away now, so businesses need to act fast to establish their liability.

Shirley McIntosh is a tax partner at RSM.