Off-payroll labour – New IR35 rules in the private sector

From April this year, new rules were introduced to the private sector, similar to those used for the IR35 Public sector reform in 2017. It is now the responsibility of all public sector businesses and medium or large-sized businesses in the private sector, to decide the employment status of their workers. These are very technically complex rules with a lot of potential permutations.

How will IR35 affect my business?

The changes will affect organisations that engage workers through Personal Service Companies (PSCs) or any other intermediary such as a partnership, LLP or an agency. This is because the new rules will require the engaging organisation (the engager) to assess if the intermediaries rules (IR35) apply to the contracts it enters into with any PSCs that are hired directly or via third parties.

Where the engager determines IR35 applies, the person or business paying the PSC (the fee payer) must apply PAYE and NIC deductions to the payment for the worker services. In other words, they must treat the worker as a ‘deemed employee’ for tax purposes. In addition, the fee payer must also account for employers NIC and potentially the Apprenticeship Levy. 

These changes could result in an increase to the operating costs of your business either:
• Directly as a result of being the fee payer
• Indirectly - as those organisations lower down the supply chain seek to increase their charges to mitigate the potential increases in their tax and NIC obligations.

If you need to assess your situation, it is important to establish the profile of your use of PSCs and, potentially, your wider non-payroll labour workers. This would include assessing:-
• How many PSCs you use
• Which parts of your business use them
• How they are used
• How important they are to the different parts of the business.

This will provide clarity to what commercial contracts are in place and if they remain fit for purpose.
An individual contractor’s net income could potentially be reduced by up to 25%, costing the typical contractor who works through a personal services company thousands of pounds in additional income tax and National Insurance Contributions. End-clients could potentially find themselves with higher costs overall, as individuals and agencies try to limit the impact of their own reduction in net income by re-negotiating.

We do recommend you take advice to avoid suffering the potentially significant financial impact the rules could have for your business.

If you require any assistance please contact Sara Kang, email:sara.kang@wardwilliams.co.uk or your usual contact.