Ask about… Retail, Fashion & Hospitality

I am an HR Director for a fast-growing chain of vegan restaurants. As a company, we constantly work to reduce our environmental impact and so we’re considering bringing in some sustainability expertise. We approached a sustainability specialist who we’ve been told is excellent to gauge her interest and she said that she’d love to work with us, but that she works through her own limited company.

We already have an IT specialist who is a contractor supplying his services in this way, and it works out well for us as it means we don’t have to worry about tax or NICs for him. However our Finance Director is concerned about using contractors in this way because she says the law in this area is changing. I think she’s referring to the IR35 regime which covers some people who work for clients through their own limited personal service company (PSC). But I thought that was all about HMRC increasing their tax revenues and that it is up to the individual contractor and their PSC to work out what to do about IR35 and sort out the tax situation for themselves so we don’t need to be concerned about it.

Is our Finance Director right that IR35 is going to change?

1. Your Finance Director has got it wrong. There was a change to the IR35 rules a few years ago but it only affected the public sector.  The position for the private sector isn’t going to change. Provided the IT and sustainability specialist are not “disguised employees”, they can supply their labour via their PSC and your business should be protected from PAYE/NIC liability.

2. Your Finance Director is right. There’s a huge regime change coming that will make using a PSC to supply labour a form of tax evasion. Do not, under any circumstances, contract the sustainability specialist in this way. You will also need to take immediate steps to change the way you pay your IT specialist, probably by putting him on your payroll.

3. Your Finance Director is right. It is currently the responsibility of the PSC to consider whether IR35 applies and, if it does, account for PAYE and NICs on “deemed employment income”. However, from April 2020 new legislation is proposing to change this and shift this responsibility (as well as a number of other obligations) to you as the client, provided your business is a “medium or large” company.

4. Your Finance Director is right that there’s a change coming. However it won’t affect you provided that you pay fees via an employment agency or other intermediary, even though you are the client of the IT and sustainability specialist.

The correct answer is C.

Many contractors contract with clients via a PSC (a company managed, controlled and owned by the individual). There are a number of advantages in this arrangement for the individual as it may enable them to make tax savings by paying themselves by way of dividends in addition to salary, and it can protect the client business from PAYE/NIC liability.

You are absolutely right that the IR35 regime was introduced by HMRC to clamp down on “disguised employment” - it was concerned at potentially losing tax revenue through the use of PSCs.  In broad terms, IR35 applies where the individual personally provides labour to a client via an intermediary such as a PSC and:

• ignoring the existence of the intermediary, the worker would be an employee or office-holder (e.g. director) of the client; or
• the worker is an officeholder and the services he provides through the intermediary relate to that office.

Since its implementation, contractors working via the intermediary/PSC have been responsible for considering whether IR35 applies and, if it does apply, accounting for PAYE and NICs on “deemed employment income” (broadly, the fees received by the PSC, excluding VAT, less certain permitted statutory deductions).

Changes to the IR35 regime were introduced in the public sector in 2017, and draft legislation published in July 2019 proposes to extend the public sector reforms to “medium and large sized businesses” in the private sector from April 2020. This will substantially increase the administrative burden on businesses and, for those arrangements that fall within IR35, significantly increase costs.

“Medium or large sized” companies are companies which do not meet two of the following conditions for two consecutive years:

• annual turnover of not more than £10.2 million;
• balance sheet of not more than £5.1 million; or
• number of employees not more than 50.

From 6 April 2020, when a contractor provides their labour via an intermediary/PSC to a “medium or large sized” private sector client, the client will need to assess whether IR35 applies and notify the contractor, the intermediary and any agency of its IR35 determination and its reasons.  If the client determines that IR35 applies, the fee payer (i.e. the entity which has the direct contractual relationship with the intermediary/PSC) must deduct PAYE/employee NICs on the fees it pays to the intermediary/PSC (excluding VAT) and account for employer NICs (and, if appropriate, the apprenticeship levy). The fee payer will be the client if there is no agency involved. The client must also provide a dispute resolution procedure giving the contractor the right to challenge the client’s determination if he/she wishes to do so.  If the client determines that IR35 does not apply, there is no change to the current position and the client can pay the PSC gross.

There are a number of steps you should consider taking in advance of April 2020 to be ready for the new rules:

• Identify individual(s) in the business who are responsible for ensuring that the business is compliant with the new IR35 regime and ensure they are suitably trained in making IR35 determinations. These individual(s) will likely either be in HR, Finance or Legal.
• Identify those contractors supplying their labour direct through PSCs (i.e. the contractor is a limited company) or via a supply agency or other employment business as well as a PSC, and audit arrangements to assess which of them fall within IR35.
• Communicate the IR35 determination and the reasons for it to the contractor, their PSC and any agency, and budget for any potential extra costs.
• Consider any documentation and systems changes that are required. 

To find out more detail on these proposed changes, you might like to have a read of this Insight.

The draft legislation published in July 2019 and current HMRC practice may change before the legislation is introduced so do keep an eye on developments and be in touch with your usual LS contact.