Budget, DMS Posts, Tax

What’s changing for small businesses in the 2020/2021 tax year?

A new tax year is starting on April 6th, which will mean many of the changes announced in recent Budgets will come into effect. Before the 2020/2021 tax year kicks off, here’s a roundup of some of the key changes small business.

Changes to some tax and National Insurance rates and bands

Some of the rates and bands have been frozen, while others have increased. Here are the rates and bands that will come into effect on 6th April:

England, Northern Ireland and Wales

2020/212019/20
Personal allowance£12,500£12,500
Employee’s NI becomes due at£9,500£8,632
Employer’s NI becomes due at£8,788£8,632
Higher rate tax becomes due at£50,000£50,000
Class 2 NI becomes due when profits exceed£6,475£6,365
Class 2 NI per week£3.05£3.00
Class 4 NI becomes due when profits exceed£9,500£8,632

Scottish Tax Rates and Bands

The Scottish rates of income tax will change to the below on 11th May 2020.

2020/212019/20
Personal allowance£0 – £12,500£0 – £12,500
Starter rate 19%£12,501 – £14,585£12,501 – £14,549
Basic rate 20%£14,586 – £25,158£14,550 – £24,944
Intermediate rate 21%£25,159 – £43,430£24,945 – £43,430
Higher rate 41%£43,431 – £150,000£43,431 – £150,000
Top rate 46%Over £150,000Over £150,000

Employment Allowance Increased

The Employment Allowance will increase from £3,000 to £4,000 on 6th April but from this date, only businesses with an employer’s NI liability of under £100,000 a year will be eligible to claim the allowance.

National Minimum Wage / National Living Wage rates per hour increased

The following rates will all increase on 6th April:

2020/212019/20
Employees aged 25 and over: NLW£8.72£8.21
Employees aged under 18: NMW£4.55£4.35
Employees aged 18-20: NMW£6.45£6.15
Employees aged 21-24: NMW£8.20£7.70

Student Loan Income thresholds

The levels of income above which student loan repayments are due will change on 6th April as follows:

2020/212019/20
Undergraduate loan: plan 1£19,390£18,935
Undergraduate loan: plan 2£26,575£25,725
Postgraduate loan£21,000£21,000

Working from home rate for employees increased

If any of your clients operate their own limited company and claim costs for working from home, HMRC will ask them for proof of any working from home costs of over £6 (rather than £4) from 6th April 2020.

Delays and cancellations to planned changes

Corporation Tax rate holds steady

The rate at which limited companies pay Corporation Tax was originally planned to decrease from 19% to 17% on 1st April but these plans have now been cancelled. The rate of Corporation Tax will now remain at 19%.

IR35 changes delayed

Changes to the operation of IR35 legislation in the private sector that were due to take effect on 6th April 2020 have now been delayed until April 2021.

DMS Posts, Tax

An essential IR35 briefing for contractors

IR35 legislation allows HMRC to collect additional payment from contractors in certain circumstances. The way in which IR35 operates in the private sector is set to change and this could have a significant impact on many contractors across the UK. This guide provides an overview of IR35 legislation and what it means for all contractors, along with an explanation of the anticipated changes in the private sector.

What is IR35?

IR35 is a piece of legislation designed to seek additional payment from contractors who HMRC believes are working in “disguised employment”. This is when a contractor’s working arrangements and contract are similar to those of an employee but, unlike an employee, the contractor enjoys the tax benefits of working through an intermediary, such as a company or partnership. When a contractor meets the criteria of disguised employment, they are deemed to be “inside IR35” and are required to make additional payments to HMRC.

When is a contractor deemed to be “inside IR35”?

The question of whether a contractor is deemed to be inside IR35 depends on a variety of factors relating to both the contract itself and the contractor’s working practices. There are three employment tests designed to help contractors and engaging organisations make this assessment, along with a number of additional factors that HMRC takes into consideration.

The employment tests

The “direction, supervision and control” test

This test focuses on the level of autonomy given to the worker. HMRC considers contractors to have more autonomy when it comes to choosing what work they do, while employees are more likely to be assigned tasks by their employer. This does depend on the individual’s skill and expertise, however, as a highly skilled employee is likely to enjoy a greater degree of autonomy than a less experienced contractor. The “direction, supervision and control” test asks the following questions of a contractor’s working practices and the wording of the contract itself:

Direction: is the worker told how to do the job at hand?

Supervision: is the worker supervised while they carry out their work?

Control: does the engaging organisation have control over aspects of the worker’s working practices, such as their work schedule?

If the answer to any of these questions is “yes”, then there’s a chance that the contractor might be inside IR35.

The “substitution” test

The test of substitution considers whether the engaging organisation would be prepared to accept someone else to do the contractor’s work in the event of them being unavailable. If the engaging organisation would not be prepared to do this and would only accept the personal service of that particular contractor, it would suggest that a traditional employment relationship exists and that the contract could therefore be inside IR35.

The “mutuality of obligation” test

Mutuality of obligation (MOO) means that one party – the employer – is obliged to provide work and the other party – the employee – is obliged to accept it. Unlike employees, contractors have no obligation to accept work and unlike employers, the companies that contract them have no obligation to provide it. As MOO is a feature of an employment relationship, if it is present in a contract it suggests that the contract might be inside IR35. When assessing a contractor’s working practices and contract, there are certain factors that would indicate that MOO isn’t present and that an employment relationship, therefore, doesn’t exist. These include:

• the use of specific projects with set end dates

• the ability for either party to stop the work with very little notice

The ‘CEST’ checking tool

HMRC developed the Check Employment Status for Tax (CEST) tool to help contractors and the companies who engage them to check whether a contract and the contractor’s working practices fall inside or outside IR35. However, some questions were raised relating to the initial version of this tool and its exclusion of the mutuality of obligation test. An updated version of the CEST tool was released in November 2019.

Additional factors that might affect a contractor’s IR35 status

HMRC doesn’t just consider the outcome of the three employment tests when assessing a contractor’s IR35 status. It looks at a wide range of factors that might indicate that the contractor is “part and parcel of the organisation” and that a traditional employment relationship might, therefore, be in place. These factors include:

• the contractor having an email address at the engaging organisation

• the contractor having permission to use company equipment

• the contractor receiving the same company ‘perks’ as their employed colleagues

• the contractor being line managed in the same way as their employed colleagues

What are the consequences of being inside IR35?

Contractors who are inside IR35 and work through an intermediary in the private sector are currently required to declare this to HMRC. If the intermediary is a limited company, the company would add a deemed payment in the contractor’s salary and deduct tax and National Insurance accordingly. If the intermediary is a partnership, the partnership would work out the deemed payment and deduct tax and National Insurance in the same way. The partner would then report this amount on their individual Self Assessment tax return as if it were income from employment.

If a contractor fails to declare their IR35 status and HMRC challenges this in an investigation, the contractor may face a penalty. Penalties are levied as a percentage of the additional tax that the contractor is liable to pay and are determined by HMRC’s perception of the contractor’s intent and the degree to which they “failed to take reasonable care” to declare their IR35 status. If a contractor knows that they are inside IR35 but chooses not to take action, they are likely to be fined more than if they had simply made a mistake in failing to declare their IR35 status. In the public sector, the onus is on the engaging organisation to assess the IR35 status of its contractors. Anyone who the engaging organisation deems to be inside IR35 is usually brought on to the organisation’s payroll as an employee and is then taxed accordingly.

Whose responsibility is it to determine if a contractor is inside IR35?

IR35 was first introduced to all contractors in 2000. At first, it was the contractor’s responsibility to determine whether they were inside IR35 but in 2017, the government rolled out changes to IR35 rules in the public sector which put the onus on public authorities to decide whether their contractors are inside or outside IR35. In the private sector, it’s currently the contractor’s responsibility to determine if they are inside IR35. However, anticipated reforms to IR35 in the private sector mean that for large or medium-sized companies, the onus will soon be on the engaging organisation to make this assessment. It’s expected that the new rules – currently sitting in draft form in the Finance Bill 2019/2020 – will be introduced in April 2020.

Who will the new rules affect?

The new IR35 rules affect contractors who provide services to large or medium-sized companies in the private sector (defined in the draft legislation as having a turnover of more than £10.2 million and more than 50 staff) and who operate through an intermediary, such as a company or partnership.

What impact will the new rules have?

Once the new rules are introduced, if a large or medium-sized private sector company deems a contractor who is working through an intermediary to be inside IR35, the company will have a decision to make. It could either change the contractor’s working arrangements in such a way that the contractor is no longer inside IR35 or it could terminate the contract. If the company wants to continue engaging the services of the contractor, it could pay them through its payroll instead. In this scenario, the contractor would become an employee of the engaging company and would have to make the same tax and National Insurance contributions as other employees. When similar reforms were introduced to the public sector in 2017 The Register reported a “mass exodus” of IT contractors from the public sector, while other news sites claimed that IR35 had made it extremely hard for the public sector to hire for contract roles. However, a report commissioned by HMRC contradicts the news reports, claiming that the change was not substantial and that IR35 had not affected the public sector’s ability to fill contract vacancies.

Uncategorized

Off-payroll: What guidance is available?

Reforms to off-payroll working (IR35 tests) are coming to the private sector in April 2020. Lucy Webb investigates what guidance is available for accountants and contractors.

Despite the seismic changes that the off-payroll working reforms will bring to contracting in the private sector, HMRC has yet to release any comprehensive guidance on the draft legislation.

The general election should not, in theory, delay the passing of the Finance Bill 2019/20 containing the off-payroll rules for the private sector, so we still anticipating an April 2020 rollout.

In the following article, Lucy Webb examines six pieces of guidance from around the tax, business and contracting world and explains who the guides are tailored towards.

  1. HMRC’s guidance

HMRC’s offering leaves a lot to be desired. While further detailed guidance and an updated Check Employment Status for Tax (CEST) tool are promised to be released later in 2019, for now we have a policy paper, which links to other pieces of guidance available elsewhere on HMRC’s website.

The guidance is very light-touch at times. However, where more detailed information is provided (such as how to identify the size of a client) HMRC’s language is far from clear. When discussing the simplified test it says:

“You must apply the rules from the start of the tax year following the end of the filing period for the second financial year when you met the conditions.”

This may be decipherable to accountants, but other HMRC ‘customers’ could struggle to work out what period is which.Who this guide is for: practitioners who would like a broad overview of the upcoming changes and how CEST can be used to reach a Status Determination Statement (SDS).

IR35 guides for contractors

It is also important that the workers who contract through intermediaries understand what changes are underway. There are a few guides that focus on the contractor-led issues of the IR35 reforms, with some highlights being:

  • The Association of Independent Professionals and the Self Employed (IPSE)

IPSE’s ‘A Guide to IR35’ is a high-level, plain-speaking overview of the IR35 legislation. It provides a few concise examples of the hallmarks of IR35 such as substitution, control and mutuality of obligation, and briefly considers what happens if an engagement is deemed to fall within IR35.

However, IPSE’s guidance is notably light on the public and private sector reforms. On those aspects, it could do with an update as the information is only correct to May 2019, before the draft off-payroll legislation for the private sector was published.

IPSE was initially formed in opposition to the original IR35 proposals, and this stance becomes apparent at certain points in its guide, such as its view of HMRC’s CEST tool.

Who this guide is for: practitioners who want contractor clients to be up to speed with the basics of the IR35 legislation and understand when it may apply.

  • IT Contracting

While this guide is aimed at IT contractors, the information contained is useful for contractors working in other industries as well.

There’s a lot to like about this guide: it’s simple to understand, explains the basic principles of IR35 and also dives into the reforms in enough depth that a contractor should come away with a good understanding of what’s changing and how these changes may impact them.

It also covers questions that contractors are likely to ask eg do I have employment rights if deemed to be a disguised employee, what happens if I have contracts with multiple clients and how will I get paid.

Who this guide is for: contractors that want to understand IR35 in more depth but who don’t want to read the legislation.

Guides for payroll

The following guides have been designed with payroll professionals in mind. While they don’t offer all the answers, they serve as a useful point of reference when understanding how payroll and the IR35 rules will interact under the new regime.

  • CIPHR

CIPHR’s guide offers a solid overview of the private sector off-payroll working reforms from an HR and payroll perspective, with a clear outline of what the IR35 legislation is, why reforms are being introduced, and what changes to expect.

It seeks to answer a few questions more specific to the world of HR, such as: will hiring post-IR35 be a challenge? It also provides an action plan for both the pre-2020 and post-2020 period, with links for further reading.

However, there are some deficiencies to be aware of. For example, the guide comments that “Holiday, sickness absence, parental leave and employer taxes for workers deemed to be employees will be due”. This isn’t technically the case, as HMRC has said that workers that provide services through intermediaries are not entitled to employment rights, such as holiday pay.

Who this guide is for: despite the technical hiccups, this guide is a great resource for HR or payroll professionals who want to understand more about IR35 and how the private sector reforms may impact their day-to-day work.

  • AccountingWEB

Kate Upcraft’s article focuses on the practical payroll aspects of the IR35 reforms that haven’t been covered by HMRC’s guidance to date.

Acknowledging that there are HR, finance, and payroll challenges when dealing with a ‘deemed employee’ contractor, Kate highlights practical steps that payroll professionals should consider, including creating appropriate payroll records, applying the correct tax code, and how to pay deemed employees and PSCs.

Who this guide is for: payroll departments looking to further understand how to apply the new off-payroll working rules.

Lucy Webb

Tax Writer 

Lucy is an ACA and CTA qualified tax writer, who writes about the latest trends in tax and accounting, including IR35 and Making Tax Digital.

Uncategorized

The revised IR35 rules that apply from 2020/21 will require the engager to issue a status determination statement and allow contractors to challenge it.

The production of the status determination statement and what happens to it after it is issued plays a pivotal role in deciding who is liable for any IR35 tax and NIC.

What is the SDS?

Under the revised form of IR35, the engager (referred in the law to as the ‘end client’) will decide whether a worker is caught by IR35 or not. However, only engagers who are themselves not ‘small businesses’ will have to do this, as Rebecca Seeley Harris explained in her analysis of the off-payroll working rules.

The engager must notify the worker of its decision about the worker’s status in a status determination statement (SDS). The SDS must explain the reasons for the decision and the engager must take reasonable care in reaching the decision. It is clearly envisaged that the SDS will be a written document.

Buck passing

The IR35 tests are not changing but the party liable for the tax and NIC, should IR35 apply, does change from April 2020 for large engagers.

Unless and until the engager provides an SDS to the worker personally, the engager will always be liable for any IR35 duties. Where, as will often be the case, the engager is contracting with an agency the engager can pass the SDS to the agency, with the result that the agency then becomes the liable party, as long as the requirement to give the SDS to the worker is complied with.

If the agency is contracting with another intermediary the agency can, in turn, pass the SDS to that intermediary, which in turn becomes liable to pay the tax.

The SDS is passed on through the supply chain until it reaches the personal service company (PSC). The buck eventually stops with the last person in the supply chain paying the PSC directly. The SDS can’t pass down to the PSC, so the PSC will no longer be liable for IR35 (unless the PSC has provided any fraudulent document to do with the employment status test).

The person who is liable for the IR35 tax (referred to as the ‘deemed employer’) must deduct PAYE tax and employee’s NIC from the payments they make to the next person in the supply chain as if the worker were on their payroll.

The law also permits anybody in the supply chain to pass on a deduction they have suffered to the next party in the chain. However, employer’s NIC liability, as well as the apprenticeship levy liability, remain with the deemed employer and there is no statutory right to deduct these liabilities, although in practice many deemed employers will probably do so regardless.

Challenging the decision

The new IR35 rules allow either the worker or the deemed employer to challenge the SDS and make representations to the engager who issued the SDS. The engager then has 45 days to either confirm, with reasons, why it upholds the SDS or to withdraw and replace the SDS with a revised decision. The draft law doesn’t say that such representations have to be in writing.

If the engager does not comply, the IR35 tax liability shifts back to the engager. Unlike the pass-the-buck procedure with the SDS, it appears from the current draft law that this liability shift is final and conclusive: it can’t be corrected by complying with the process outside the 45-day window once the deadline is missed.

The clock starts ticking upon receipt of the SDS challenge, which is a problem for agencies in the chain. For example, an agency might believe it is liable for the IR35 tax and thus entitled to make PAYE deductions. But that agency won’t know whether a worker has challenged the SDS issued by the engager, or whether the engager has responded.

CEST issues

In recent cases, HMRC has consistently got IR35 wrong. However, engagers are expected to make an accurate status determination in this notoriously complex field of law.

The revised IR35 rules seem designed to nudge engagers towards using HMRC’s check employment status for tax (CEST) tool.

The CEST tool may provide a reasoned conclusion on IR35 which would satisfy the SDS requirements. However, in many cases, the CEST tool returns an “unable to determine” conclusion. This is not an option open to the engager. An equivocal conclusion is not a valid SDS – the legislation expressly prohibits any sitting on the fence.

However, the CEST tool leans incorrectly towards disguised employment, as it doesn’t take into account the fundamental characteristic of any employment relationship, which is the degree of mutual obligation to offer and accept work (the MOO).

Implications of getting it wrong

Engagers making IR35 decisions that are too harsh or cautious will be incorrectly imposing employer’s NIC and apprenticeship levy liabilities on themselves or others, and therefore will face inevitable commercial problems engaging contractors to do work.

The engager will also have to provide the worker directly with an SDS. It will be interesting to see the response of contractors who are given a document telling them that they are being engaged as a ‘disguised employee’ without any employment rights.

If engagers get things unreasonably wrong the other way, they risk a retrospective IR35 tax liability, as well as penalties for carelessness. The engager may also have missed the opportunity to recover those liabilities from the contractor’s PSC under PAYE, or to pass the liability obligation on to an agency.

Recovery powers

The draft Finance Bill clauses give HMRC the power to make regulations to allow it to recover IR35 debts from anybody who is party to the arrangements. This would encompass the engager, the agency or any other intermediaries in the supply chain, the PSC and the worker. However, the precise circumstances of debt recovery are not yet known.

Preparation is key

All parties in the supply chain will need procedures to ensure that an accurate SDS is made, passed on to the correct parties at the correct time and that any challenges to the SDS are dealt with and communicated properly. All this will need to be carefully documented in the case of any dispute about the tax liability.

DMS Posts

Be prepared for new IR35 rules

Rebecca Seeley Harris drills into the proposals for off-payroll working (IR35) rules to apply in both the private and public sector from 6 April 2020 and provides tips on how to prepare.

The latest consultation on the off-payroll working rules offers wide-ranging insight into what is to come and also provides some clarification on the existing public sector rules. The consultation refers to the customer or engager of the worker as the “client” throughout, and this is the term that is used in this article.A

The April 2020 reform will use the off-payroll working rules in the public sector as a starting point. The client will be required to make a determination of a worker’s employment status and communicate that determination. If the determination of employment status is “deemed employee”, the fee-payer will need to make deductions for income tax and NICs, and pay any employer NICs.

The small company exception

The reforms will only apply where the client is a medium or large business, or a public body, which means there is an exception for clients who are small businesses. The government has chosen to use the definition of ‘small company’ in the Companies Act 2006, mainly because businesses and accountancy professionals should already be familiar with this definition and to what extent it applies to them.

The Companies Act definition doesn’t include non-corporate entities so, the government is proposing two options:

a)           to apply the reform to unincorporated entities with 50 or more employees and to entities with a turnover exceeding £10.2m.

b)           to apply the reform only to unincorporated entities that have both 50 or more employees and a turnover in excess of £10.2m.

When an organisation becomes or ceases to be “small” in an accounting period, the change relating to the off-payroll rules will apply from the start of the tax year following the end of that accounting period. This is the case regardless of whether the organisation is incorporated or unincorporated.

Practical effect

From 6 April 2020, any client organisation which falls within the rules will be liable for any income tax and Class 1 employee NICs due on deemed payments of employment income until it has fulfilled its obligations. These organisations will also be liable for employer NICs due on those same payments.

It is not clear how an off-payroll worker would know whether the engager should be applying the rules or not or whether, as in the case of the small company exception, the off-payroll worker themselves should be making the determination.

Information sharing

The proposed reforms are designed to ensure the determination of employment status, and the reason for that determination, are cascaded to all parties within the labour supply chain. The consultation document doesn’t comment on whether the client is required to make the determination themselves, or whether the client could outsource the employment status decision and the whole process could be handled by an external team.

For off-payroll workers, the client will be required to provide the determination of employment status and, if requested, the reasoning for the determination, to the worker directly. The legislation will be changed to provide clarity that the client must provide both the contracting party and the off-payroll worker with the determination of status for each engagement.

Under the current public sector rules, the fee-payer is not entitled to see the determination of status, but the government intends to legislate to require all recipients of a determination to pass that information on to the next party in the contractual chain at, or before, they make the first payment.

Long chains

A ‘short circuit’ solution will be available where labour supply chains are long and complex. In this version, the fee-payer would receive the determination of status directly from the client. This would require the client to know who the fee-payer is. As a result of the complexity, the government is seeking views on how the client may be in a position to identify the fee-payer and provide the determination to the party they contract with, the off-payroll worker and the fee-payer directly.

What is clear is that all parties in the labour supply chain will need robust systems to ensure that they can track that the determination of status has been cascaded and received by the next party in the chain. Otherwise, they risk having the liability for tax transferred to them.

Tax liability

In the event that HMRC does not receive the tax due, the government is proposing that the liability should initially rest with the party that has failed to fulfil its obligations. If, however, HMRC was unable to collect the outstanding liability from the defaulting party if, for example, it ceased to exist, the liability should transfer back to the first party or agency in the chain. If HMRC could not collect from them, it would then default back to the client.

The government believes that as the agency is the first supplier of labour to the client, it should be responsible for the behaviour of the chain. The government also believes that the agency has a number of options open to it such as getting an indemnity against non-compliant fee-payers, taking on the fee-payer responsibility themselves or choosing to only work with reputable firms.

Challenging status

Currently, there is no mechanism for challenging a status determination other than the off-payroll worker using the end-of-year processes for overpayment of tax. In addition to the off-payroll worker being entitled to receive the status determination and the reasoning for the determination from the client, the government understands that the off-payroll worker or the fee-payer may disagree with a client’s determination. This might be either because it is believed that the full circumstances have not been considered, or that the client has not taken reasonable care in making the determination.

There are two steps proposed for resolving any status disagreements:

  1. To have the right to seek the status determination directly from the client.
  2. To allow for the status determination to be challenged.

The government plans to introduce a client-led status disagreement process where the client will develop and implement a process to resolve disagreements based on a set of requirements laid out in legislation. This client-led process should also mean fewer off-payroll workers using the end of year processes to reclaim tax, and it is hoped that it will provide a resolution in real time.

No employment rights or benefits

As applies in the public sector, statutory payments and other employment rights will not be affected by the proposed reforms to off-payroll working rules from April 2020. This means that the deemed employment relationship for tax purposes will not result in employment rights or statutory payments obligations for the deemed employer or for the fee-payer.

Be prepared

Organisations affected by the reforms to off-payroll working should take the following actions now to prepare:

  1. Identify and review their current engagements with intermediaries, including PSCs and agencies that supply labour to them.
  2. Review current arrangements for the use of contingent labour, particularly within the organisation functions that are more likely to engage off-payroll workers.
  3. Put in place comprehensive, joined-up processes (assess roles from a procurement, HR, tax and line management perspective) to get consistent decisions about the employment status of the people they engage.
  4. Review internal systems, such as payroll software, process maps, HR and on-boarding policies to see if they need to make any changes.

Written by:

Rebecca Seeley Harris

Employment Status & IR35 expert

PKF Francis Clark LLP