Out-Law / Your Daily Need-To-Know

IR 35: Banks to bring contractors onto payroll

Out-Law News | 15 Oct 2019 | 2:11 pm | 3 min. read

According to press reports, some banks have informed contractors that they will not extend the contracts of contractors who provide their service through personal service companies (PSCs), in response to new off-payroll working rules which come into force in April 2020.

"Banks tend to have very large numbers of off-payroll workers. Deciding not to engage contractors through PSCs takes away a big compliance headache," said Penny Simmons, a tax expert at Pinsent Masons, the law firm behind Out-law.com.

From April 2020, businesses engaging contractors through PSCs will become responsible for determining the individual's employment tax status and for applying PAYE to payments made to the contractor, if they decide the individual would have been an employee if engaged directly. In these circumstances, engagers will also be liable to pay employer's national insurance contributions (NICs). The changes will not apply to small businesses which engage contractors through PSCs.

Current rules, known as IR35, require that employment taxes and NICs be paid in respect of a person who provides services through a PSC, if that person would have been regarded as an employee of the engaging business if they had engaged directly with the business. Currently, where a private sector business engages a contractor through a PSC, liability to decide whether IR35 applies and to pay any employment taxes rests with the PSC.

This is in contrast to the public sector, where following changes to the rules in April 2017, public authorities and other public sector engagers are now responsible for accounting for tax and NICs, if the contractor would have been regarded as an employee for tax purposes under the IR35 rules.

"Once the new regime is in force, it won’t always be easy to work out whether an arrangement with a contractor falls within the IR35 rules and whether employment taxes are payable. Although HM Revenue & Customs (HMRC) has provided an online tool called CEST to determine a contractor's tax status, this won’t always provide a definite answer and the answer it gives will depend upon the quality of the information inputted. The CEST tool is currently being revised but the new tool is unlikely to be available before the end of the year," Penny Simmons said.

"Determining status can be difficult as it depends on a number of factors, not just on what the contracts say, but also on how the individual is actually treated in practice," she said.

Businesses will be required to provide a statement determining the employment tax status of contractors working through PSCs directly to the contractor, including reasons for the determination. Contractors will have the right to disagree with the determination through a new business-led status disagreement process.

Where a business engages with a PSC through an agency, the agency will be required to operate PAYE and pay NICs if the engaging business determines that IR35 applies. The business will be required to pass the status determination statement to both the agency and the contractor. If the agency fails to pay any PAYE or NICs due, the liability will pass back up the supply chain to the engaging business.

However, some professional bodies, including the Law Society and the Association of Tax Technicians have criticised the wide ambit of this secondary liability rule in the draft legislation.