Why are we starting to talk now about a change in tax laws which won’t apply until April 2020? Because what you do now can materially alter how big a bite HMRC takes out of your business when we get there.
IR35 applies where an individual supplies their services to you through their own personal services company (PSC). Historically it acted to put income tax and NI liabilities onto the PSC so as to prevent individuals paying themselves primarily in dividends and so side-stepping the higher tax rates applicable to earned income. IR35 has now been revisited, so far in the public sector only, to narrow the scope for tax avoidance still further. As amended, it works like this: if it were not for the PSC in the middle, would the individual providing the services reasonably be deemed an employee of the recipient of them? If so, then on the basis of that hypothetical employment relationship, the PAYE and NI liabilities will shift to the end-user, making fees for what appear to be commercially-provided services suddenly taxable at source.
That revision is now being extended into the private sector from April next year. The details of its implementation must await Government guidance due out in March this year, though as it is therefore competing for Parliamentary head-space with Brexit, some slippage seems entirely possible. However, there are some principles and lessons obvious from the public sector experience which are bound to survive and which you can start acting on now. In particular, you can begin by asking yourself the necessary hard questions – how much contractual and practical distance can I insert between me and the individual providing the services before that begins to conflict with the needs of my business in terms of branding, reliability of supply, quality control, etc.?
While “new” IR35 will almost certainly not impose tax liabilities on end-users retrospectively, it is very likely that your practice pre-April 2020 will be relevant to the determination by HMRC of that key question at that time – if it were not for the PSC, would this person providing services to me probably be my employee for tax purposes?
In the rest of this IR35 series we will look at those principles and lessons from the public sector and the practical steps which you can take now, both in the management of existing contracts and the terms of new ones, to mitigate the IR35 risks. Questions we will cover include the real value of tax indemnities in contracts with PSCs, how far you can rely on commercial law to replace contractual provisions and what due diligence you might sensibly make of your intended suppliers of services before agreeing to work with them.