Frequently Asked Business Question:
I run a small business and I use a number of consultants who operate through their own companies. I have read in the recent Budget that I may need to treat these consultants as employees and deduct PAYE and NIC. Is this correct?
Chancellor Philip Hammond revealed in his Budget 2018 speech that the Government intends to extend the 2017 public sector off-payroll working or ‘IR35’ reforms to the private sector.
The reform will see the responsibility to determine if a contractor falls within the IR35 rules pass from the contractor to the engager or agency. Where the relationship is deemed to be within IR35, the engager would be responsible for operating PAYE on payments made to the contractor but only where the engager is a medium or larger business.
Until the reform takes place, the contractor will continue to be responsible for determining their own IR35 status. Right now, as per the current law, the private sector business that hires an individual through a UK intermediary does not have to pay any pay-as-you-earn (PAYE) or National Insurance Contribution (NIC) liabilities if there is a contract signed between the parties.
The announcement will have wide ranging ramifications for contractors and those who engage them. In addition to the compliance burdens the change will create, there will be negative tax consequences where a contractor is deemed to be within IR35.
It will be important to understand who will get an exemption as a small business. The revised IR35 rules will not apply where the engaging business is ‘small’ but, it is not yet known how the government will define ‘small’. The standard EU definition of a medium-sized business has fewer than 250 employees, a turnover not exceeding €50m or a balance sheet total not exceeding €43m. The UK Companies Act 2006 has a similar definition, but what is likely is that those businesses with fewer than 50 employees will be exempt from the new rules, although the existing IR35 rules for the private sector will still apply.
In order to determine the status of the individual, HMRC has stated that it will continue to use the CEST (Check Employment Status for Tax) tool, but to work with stakeholders to improve it and to give further guidance before the reform comes into effect.
In a welcome development, the Government has accepted that bringing in these reforms in 2019 would have been too soon and the proposed reforms will be delayed and apply from April 2020 instead.
Whatever evolves between now and April 2020, the compliance burden will be increased but hopefully the government will have found the solution to the employment status question, the subject of a previously unanswered consultation, otherwise businesses will be solely reliant on CEST.
It is expected that a further consultation will take place on the detailed operation of the reform and we must hope that this brings improvements and clarity on the employments status question.
The advice in this column is specific to the facts surrounding the questions posed. Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.