Since the IR35 rules were introduced in April 2000 they have been ignored by most engagers, as the responsibility for deciding whether the worker is caught by IR35 lies with the worker’s personal service company (PSC).
This decision-making responsibility was switched to public sector engagers from 6 April 2017, and it will switch to large and medium sized private sector engagers on 6 April 2020. However, the mechanism will also change from April 2020 as the engager must issue an employment status determination for the worker, which is passed down the chain of agencies until it reaches the worker. Thus each link in the chain should be informed of the engager’s decision about the worker’s status.
The worker can object to the employment status decision, giving reasons, and the engager (referred to as “the client” in the HMRC guidance) has 45 days to respond. Meanwhile the engager must continue to apply the IR35 rules in line with its determination.
The worker can of-course choose to leave the contract and seek work elsewhere, or request a higher gross fee to compensate for the tax and NIC which will be deducted from that fee.
The fee-payer will not normally be the engager, but another agency in the chain which pays the worker’s intermediary (the PSC). It is the fee-payer’s responsibility to deduct tax and employee’s NI from the worker’s fee, and report those deductions through RTI. The fee-payer should not deduct employer’s NIC from the worker’s fee, but pay that as an extra charge.
Small private sector engagers will not be required to make the employment status determination, and in those cases the PSC will make the decision as now. The HMRC guidance doesn’t explain the criteria for a “small” business, which is one that meets two of these conditions for the accounting period:
- less than £10.2m turnover
- less than £5.1m balance sheet
- no more than 50 employees
It is apparently up to the engager to tell the PSC whether it qualifies as small, which leaves a huge scope for confusion and mis-communication.
Written by the Tax Advice Network