Large and medium-sized businesses that use contractors have been gearing up for off-payroll working rules extending to the private sector next spring.
From 6 April 2020, private firms are set to assume responsibility for deciding if a contractor supplies a service as a sole trader or an employee.
They will be liable if HMRC deems the contractor’s employment status to be incorrect. Similar reforms were implemented in the public sector in 2017.
But, while most private-sector businesses have their plans in place, the new government could yet kick this tax change into the long grass.
Chancellor Sajid Javid said earlier this month that extending the rules to the private sector would be part of a review to better support the self-employed.
“In our manifesto, we promise a review of how we can further help the self-employed,” Javid told Money Box on BBC Radio 4.
“But one thing in particular I want to look at again are the proposed changes to IR35.”
The extension to the private sector was included in Finance Bill 2019, but that has yet to be legislated for in the subsequent Finance Act.
The new government faces a race against time for that Bill to receive royal assent, and another temporary delay seems likely.
That said, the rules will be extending to the private sector in the near future and it’s important to give this complex tax reform the focus is warrants.
The off-payroll rules
Private-sector contractors need to consider several factors before they opt to move onto payroll or remain self-employed.
Firstly, with employment contracts there’s a mutuality of obligation for an employee to work and for their employer to pay for that work. There are no such continuing obligations with self-employment agreements.
Secondly, if the changes go through and you don’t want to be taxed at source, you need to prove you’re self-employed. Having different projects at one time, or being paid after submitting an invoice, should work.
Finally, there are complex rules surrounding substitutions – can you send someone else to do the work in your place? We can explain to you in more detail if required.
Check employment status for tax test
The check employment status for tax (CEST) test is what HMRC uses to determine if contracts are inside or outside of the off-payroll working rules.
It was introduced in 2017 to help public-sector authorities quickly decide on a contractor’s employment status. But the CEST tool does not take into account the mutuality of obligation as the Revenue assumes it is already established.
Calls to reform the CEST tool led to an update last month, although bodies representing self-employed people insist this has failed to address the issue.
A good place to start preparing for these changes, regardless of whether they come in from April 2020 or, say, 12 months later, is to establish if you are likely to be treated as an employee before using the CEST tool.
In some cases, you may be better off being taxed at source as a permanent employee.
If in any doubt, get in touch with one of our tax experts by calling 0141 221 2257 or emailing email@example.com