What is the current situation?

Since 2017, an individual working for a public sector organisation through a personal service company (“PSC”) has not needed to decide whether they might be treated as an “employee” by HMRC and compelled to pay payroll taxes and NICs under IR35. This is because public bodies (e.g. NHS, civil service) have been required to make the decision on whether a contractor is caught by the rules, and if so, apply PAYE to payments made to the PSC as if it was an employee. More contractors have been brought within PAYE because of this, and while it usually results in higher tax and national insurance payments, it does at least bring more certainty to the situation.

What is changing?

When the new rules were introduced to cover those working in the public sector, it was proposed that these rules would in time, be extended to all PSCs, including those working in the private sector. Draft legislation, intended to take effect from April 2020, has now been issued by HMRC with more details about how this will work. However, the proposed new rules do not extend to all client organisations, only those which are not classified as “small” under the Companies Act (see note below). This means that if a contractor is working for a small company through a PSC, the existing IR35 rules will continue to apply to them (i.e. it will be down to him/her to decide whether they are caught by the rules).

How will it affect you, the PSC contractor?

The question is, how will you know if your client qualifies as a “small” company or not? If they are “medium” or “large”, they will have to tell you whether they consider you to be caught by the rules and it will then be down to them to deduct PAYE from payments which are made to your company. If they don’t tell you that they consider you to be caught then you will have no more to worry about, and if they tell you that in their opinion you are caught, you will have a chance to dispute this (although it is not clear who will arbitrate in this situation).

If you hear nothing from your client, you will not know whether this is because your client is small, or because your client is “medium” or “large” and has decided that the relationship is not caught by the rules. It will therefore be important for contractors with PSCs to find out where they stand with their clients, because if they do nothing they may find that they are within IR35 because they are working for a “small company” client.

There is time for the rules to be altered before they are enacted, and we will be monitoring this. Given the greater emphasis being put on medium and large clients to decide whether the relationship is caught by the IR35 rules, it is inevitable that the labour market will change with the result that less clients will want to contract with PSCs where there is any doubt about the tax nature of the relationship.

Note – A small company is one which has any two of the following: Turnover £10.2m pa or less : Balance sheet gross assets of £5.1m or less : 50 employees or less. If the client is not a company (i.e. a sole trader or partnership), only the first test (Turnover) will be applied.

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Author: Peter Hedgethorne, Director, Plus Accounting

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