Changes to IR35 are around the corner and come into effect in April 2020. This could have a major impact on event staffing and the way staff are paid and taxed.
The biggest change is the responsibility of IR35 status will now rest with companies rather than the employees. It is vital event professionals and promo agencies know about IR35 and look out for “disguised employment”.
In this article, we’ll provide an overview explaining what IR35 is, what the changes are, who this will impact and what event staffing agencies need to consider.
What is IR35?
IR35 is a piece of legislation that allows HMRC to collect additional payments where a contractor is an employee in all but name. Whilst historically there has been no real need for private sector employers to understand IR35, from April 2020 the rules are due to change, affecting the way private sector contractors are paid.
IR35 is designed to close a loophole in the tax system where workers could use the setup of a limited company structure in order to pay less tax. Where, despite a contract being with a limited company, the reality is more like an employer-employee relationship, the worker should be taxed as an employee. This is referred to as a ‘deemed employee’.
How is IR35 status determined?
As of April 2020, the end client will determine IR35 status. That status determination is provided in writing to the worker and agency. The end client has 45 days to respond in writing if a contractor disagrees with their conclusion, and there is no right to appeal. HMRC has a Check Employment Status Service tool (CEST) to help businesses decide the status of individuals providing personal services to them.
The link to the Employment Status Service tool is www.gov.uk/guidance/check-employment-status-for-tax.
What will the changes be?
- Private sector clients will be responsible for assessing whether contractors are self-employed by applying the IR35 criteria. This shifts the responsibility and risk, which has until now been that of the contractor, onto the end client. The change in legislation excludes engagements with small companies, where contractors will continue to determine their own IR35 status.
- The medium or large business (or an agency paying the PSC) will calculate a ‘deemed payment’ based on the fees the PSC has charged for the services of the individual.
- The entity that pays the PSC for the services must first deduct PAYE and employee National Insurance contributions as if the deemed payment is a salary paid to an employee
- The paying entity will have to pay the HMRC not only the PAYE and NICs deducted from the deemed payment but also employer NICs on the deemed payment.
- The net amount received by the PSC can be passed onto the individual without paying any further PAYE and NICs.
Who will this affect?
Medium and large businesses
Medium and large businesses will be affected by IR35 legislation, but “small organisations will be exempt”. A small company meets two or more of the following criteria:
- a turnover of not more than £10.2million
- a balance sheet total of not more than 5.1million
- no more than 50 employees
Anything more than this is a medium/large business and therefore qualifies for IR35.
Contactors with a limited company who do paid work for a client need to decide if the work they are doing is inside or outside IR35. From April, that decision and the responsibility to pay tax and insurance will move to the end client.
Individuals/Personal Service Company (PSC)
An intermediary may be another individual, a partnership, an unincorporated association or a company. If the personal services of the individual were provided under a contract directly between the individual and themselves, the individual would be regarded as an employee of the business. This is the same kind of employment status test based on case law that businesses and agencies have to consider when they hire staff directly.
Sole Traders and the Self-Employed vs Employees
IR35 is only applicable to limited company directors. It is a matter of judgement whether the nature of and manner in which the services provided point to employment or self-employment. However, if a sole trader works for a client on a contract basis in a way in which could be deemed “disguised employment”, then the end client is at risk of being considered the employer and being held responsible for the individual working inside IR35. In this situation, the client would be liable for the unpaid PAYE, National Insurance and Employers National Insurance, not the sole trader.
When will new changes to IR35 happen?
The new tax rules apply to amounts paid from 6 April 2020, therefore current contracts may be affected. On 7th February 2020 HMRC published a minor change to the implementation of the rules, which means they will only apply to payments made for services provided by PSCs on or after 6th April 2020. The outcome of the implementation review should be known by the end of February 2020.
Timings to consider:
If a contract ends during the 2020/21 tax year, the paying entity should send staff a P45 showing the total deemed payment and deductions for PAYE and NICs.
If a contract extends over the 2020/21 tax year, the paying entity should issue a P60 to staff showing the total payment and deductions in the 2020/21 tax year.
Why is this happening?
The practical effect of these rules is that PSC’s will no longer benefit from the potential tax advantages of receiving income via their own company if they are deemed to be within IR35. There may also be pressure from businesses to renegotiate contracts due to their increased cost of employer NICs.
How changes to IR35 will impact the Event Staffing Industry?
These changes may have an impact on your event staffing company or promo agency and the way you employ your workforce. If you currently employ flexible/promo staff as self-employed it will be your company’s responsibility to make sure they are actually self-employed under the IR35 guidelines. It may be worth considering switching all staff to employed status rather than run the risk of breaking guidelines, as the responsibility will now be with the end client. We would strongly recommend gaining professional advice from your accountant or financial department and have a game plan in place before April 2020.