Already in force in the public sector, the IR35 (off-payroll working) legislation is designed to ensure off-payroll workers pay broadly the same tax and National Insurance contributions as their employee colleagues.
The legislation, which is due to be extended to cover private sector companies, defines off-payroll workers as being those who work for a client through their own intermediary, but who would be an employee if they were providing their services directly.
An intermediary can be a worker’s own limited company – known as a personal service company (PSC) – a partnership, or another individual. People working through an intermediary pay Income Tax and National Insurance contributions in a different way to an employee.
Jon Harvey, employment tax supervisor at MHA MacIntyre Hudson, warned that HMRC’s consultation on the proposed application of IR35 legislation to private companies shines a spotlight on the additional complexities of rolling out the changes to the private sector.
“It’s always been the intention to exclude small businesses from the rules, but there is still no watertight definition of what will constitute a small business,” said Jon. “In the public sector the size of the organisation is irrelevant as the rules apply to all. However, in the private sector the size of the business will be a crucial factor.
“A legal no-man’s land beckons for small private companies: do they need to implement IR35 rules or not?”
Jon outlined how the current consultation suggests taking the definition of a small company from the Companies Act 2006, but this only applies to limited companies.
He warned: “If you’re a small unincorporated business, for example a sole-trader or a partnership, you probably need to tread very carefully and take appropriate advice before concluding you’re safe from IR35.
“The consultation proposes defining whether an unincorporated business is small by the number of its employees. This is a questionable approach given a company might qualify as small only if it defines members of its workforce as off-payroll, the whole crux of the issue IR35 is trying to address.” Jon added the consultation also raised a significant question over timing, with HMRC pledging the legislation to introduce IR35 changes will be in a draft Summer Finance Bill, while the consultation runs to 28 May 2019.
“This leaves a very short window for it to be incorporated into any draft Summer Finance Bill, which would have to be published soon after the deadline to allow time to pass through parliament,” said Jon.
“Introducing the relevant IR35 legislation after the Autumn Budget may be too late to meet the target implementation date of April 2020.
“In trying to introduce complicated legal changes in a relatively short space of time, the government is likely to run up against its own self-imposed deadline, and a potential repeat of what happened when IR35 was introduced in the public sector where we saw employers left with a little over two weeks to understand the new rules and put in procedures to ensure they remained compliant with the new legislation.”