Technical tax legislation doesn’t usually make mainstream news, but incoming changes to the U.K.’s IR35 legislation in April have done just that.
This is because the changes that are due to come into effect on the 6th April 2020, shift the responsibility for determining whether a contractor falls within the scope of the legislation.
This determination was previously made by the contractors themselves, but now the responsibility (for medium to large private sector businesses) will fall on the business rather than the contractor.
Who will these changes impact?
As reported in the Financial Times, “the changes will mean hiring companies, and anyone involved in the labour supply chain such as recruitment agencies, will be liable for unpaid tax if HMRC finds a worker has been wrongly classified.”
This has predictably caused consternation across the private sector, and companies including IBM and GlaxoSmithKline, as well as Lloyds Bank, HSBC, and Barclays Bank, have responded by placing blanket bans on engaging contractors through Ltd or PSC company structures, instead forcing them all to work through umbrella solutions or in some cases taking them directly onto their payroll.
Why is this controversial?
In theory, the legislation aims target workers who are effectively employees, but using Ltd or PSC company structures to pay less tax than a full PAYE employee would.
In short, the legislation aims to identify persons as “deemed employee”, and then tax them as such.
However, none of the benefits of being an employee are conferred by the transfer of status to “deemed employee”.
Job security, sick pay, and annual leave, for example, are all still omitted despite the contractor’s newly increased tax bill.
For the hiring companies themselves (such as the companies listed above) it often doesn’t make commercial sense to take many of these workers onto the payroll because their expertise is a time-limited requirement (such as for a specific project).
Therefore, the obligation that would be placed on those companies for continued employment of these workers after the completion of a project would not be viable.
Will the changes definitely go ahead?
For now, it seems very unlikely that the U.K. government will pause or delay the changes, and far more likely that they will be confirmed in the March Budget to come into force on 6 April.
However, there is strenuous opposition to the changes from a variety of industry lobby groups, and this is likely to intensify over the next few weeks.
Our company isn’t based in the U.K., but we have a project that requires workers in the U.K., how will this affect us?
Provided you are planning to use a Professional Employment Organisation (PEO), this shouldn’t affect your company.
However, you will want to ensure that the PEO Service provider you choose is paying the workers as employees, and deducting all applicable PAYE taxes and social security and paying directly to the U.K. revenue services (HMRC).
To ensure compliance, and to aid transparency for our clients, Casterrian provide quarterly reports which detail exactly which taxes have been deducted for each employee, and what their tax registration status is.
These reports do not require further action, but can be held on file as a record of in-country compliance.
We are experts in local and international employment and payroll legislation, and can help guide our clients through the minefield of cross border employment.
We continuously update our working practices and contract structures to ensure that they remain in compliance with any and all legislative changes, including the impending changes to IR35 in the U.K.
If you have a project you are hiring for, get in touch to find out how we can simplify the process and reduce your risk exposure.
Disclaimer: This article is a marketing communication and should not be considered as legal advice. This document is a general communication being provided for informational purposes only.