Private sector contractors and IR35

We are just under 6 months away from the 2020 tax year starting, and with it the extension of the IR35 legislation to include contractors in the private sector. From July, when the draft legislation was published, the estimation was that around 180,000 individuals working through their own personal service company (PSC) could be affected, in addition to around 60,000 businesses who engage contractors using such models. so what's happening?

Since the draft was published, hirers have been coming to terms with the changes and the unpopular ‘transfer of liabilities’, ‘transfer of debts' and perhaps least welcomed, 'self-policing' nature of the new rules.

Whilst HMRC is no doubt delighted with the wording, there is little doubt that firms are nervous that they could be saddled with a tax liability from a PSC, and we are already seeing reports of large companies refusing to take on new contractors in 2020, potentially leaving businesses with higher costs or skill shortages.

So what exactly is the big fear for hirers and other companies in the supply chain? In short, "debt transfer": The new legislation gives HMRC the power to collect unpaid PAYE from other parties in the supply chain. This already applies to all contracts in the public sector, and now engagements with medium and large companies in the private sector from April 2020.The regulations allow for recovery from a ‘relevant person’ of any amount that an officer of HMRC considers another person should have paid under PAYE regulations in respect of a deemed direct payment.This means that if the fee payer fails to pay the PAYE tax and NI liability, HMRC can simply collect the unpaid liability from other organisations in the supply chain.

Who is affected? Individuals supplying their services through an intermediary, such as a PSC, and those who would be employees if engaged directly. This applies to all medium and large-sized organisations in the private sector that engage with individuals through PSCs, but also includes recruitment agencies and other intermediaries supplying staff through PSCs.

The long-term results of the legislation can only be guessed at currently, but leading industry figures fear that blanket, one-size-fits-all ‘inside IR35’ rulings on PSCs will increasingly be the response from the very largest of hirers, and that this would lead to a domino effect where other businesses, to save time and protect themselves either follow with such blanket assessments ot simply refuse to engage limited company contractors due to the IR35 changes. Questions remain as to whether the affected contractors will be forced to become employed or have to use umbrella companies.

FPS is not an employment intermediary, and we offer a PAYE payroll service that is outside of the scope of IR35. Whilst we know that may not be suitable for everyone, we can at least give you the comfort that all taxes and NICs are paid. Call our client services team on 0333 666 1510 to talk to an advisor today.

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