With effect from 6 April 2020 independent health and social care providers, engaging consultants via a relevant intermediary (such as a personal service company), will be subject to changes in the IR35 tax rules, which will bring the private sector in line with existing public sector obligations. If steps have not been taken for IR35 readiness, Bevan Brittan’s summary below provides a useful overview of recommended next steps for all private sector organisations who may come under the new regime.
What is IR35?
IR35 has in fact been around since 2000 and was implemented by the government as a means of taxing contractors who provide their services through an intermediary, often known as a personal service company (PSC) in the anticipation of avoiding income tax on their earnings. In certain circumstances, the PSC could be a partnership or other arrangement, where the contractor has sufficient control over the way the PSC entity operates. The term PSC is used in this note to cover all such relevant intermediaries.
The proposed legislation will apply to all “medium and large” business in the private sector, that is businesses with an annual turnover in excess of £10.2 million (or a balance sheet over 5 million) and/or which engage over 50 employees.
Where the relevant conditions for IR35 are met, up to 5 April 2020 the PSC is required to determine whether the engagement meets particular conditions and where it does so deduct income tax and national insurance deductions must be made from the payment the contractor receives, irrespective of what their contract states. The relevant conditions are:
- The individual personally performs services for an organisation
- Those services are provided under an intermediary (such as a PSC)
- The circumstances are such that if the individual was directly engaged by the organisation they would be regarded as an employee.
From 6 April 2020, the obligation to deduct income tax and national insurance contributions moves from the PSC to the entity that pays the personal service company for the services. In certain circumstances, where another intermediary is involved, that obligation to deduct income tax and national insurance can fall on the private sector organisation that utilises the services.
In order to implement this, with effect from April 2020 a specific legal requirement will be placed on private sector organisations to determine the employment status, for taxation purposes, of all contractors who are engaged through a PSC (whether or not also engaged via an agency) before that person becomes engaged by it, and to notify the PSC (and any agency through which the PSC is engaged) of their deemed employment status. This means that anyone who is granted practising privileges but is not an employee of the organisation and is engaged via a PSC should be assessed to determine what, if any, IR35 risk arises under the current arrangements. Private sector organisations (including agencies) will be obliged to undertake this exercise and issue a Status Determination Statement (“SDS) at the outset of any agreement with a contractor.
Failure to determine the correct employment status where a PSC Is involved when a contractor is engaged (such as failing to take ‘reasonable care’ when undertaking an assessment for SDS or in providing a SDS) will result in the organisation automatically being deemed as the Fee Payer.
4 steps to prepare for IR35
1. Identify and Plan
- Carry out an audit now to identify any contractors who have been granted Practising Privileges by the organisation who will be subject to the IR35 employment status assessment next year
- Undertake the relevant HMRC assessment, on a case by case basis, before the legislation comes into force on 6 April 2020.
- Review existing arrangements and plan any changes as appropriate
- Plan appropriate steps to address any tax and other liabilities which may arise and/or resource gaps if individuals no longer wish to be engaged via practising privileges.
- Communicate to existing contractors and any agencies you work with to confirm any timeline for assessments and further communication regarding assessment outcomes.
- Communicate the assessment outcome results as soon as reasonably practicable with any existing contractors and where applicable, the agency which engages them.
- Some contractors may not want to be engaged if income tax and NIC will have to be deducted from payments to them and could choose to relinquish their services. Identifying any skills gaps this will create early on will of course be essential to ensuring business continuity.
3. Review systems and processes
- Carry out relevant audits of your current engagement models with consultants and other staff
- Review relevant contractual documentation to ensure that they do not indicate an employed arrangement
- Take appropriate steps to integrate the employment status assessment into your recruitment process for contractors engaged through a PSC to whom you grant practising privileges.
- Review, amend and implement measures to ensure there is a clear differentiation between employees who may be directly engaged with practising privileges and self- employed or external contractors granted practising privileges by the organisation.
- Review your commercial agreements to see if there is any scope to re-negotiate if advantageous.
Recent Government Consultation
On 7 January 2020, the government launched a review into the proposed amendments to IR35 tax rules. The review seeks to gather and consider the views of representatives of affected parties to ensure smooth implementation of the rules but it is not anticipated that the review will fundamentally change the current position and/or start date of the reforms in April, 2020. Businesses should therefore be considering what appropriate steps should be taken and undertaking appropriate planning in readiness for proposed changes in April 2020 alongside ongoing monitoring of any further Government announcements on this topic.
How can we help?
Bevan Brittan is a market leading legal adviser to the independent healthcare sector. We are working with many organisations to help them to review and audit their current processes to ensure that they are in line with the new IR35 rules. We can assist with a review and drafting of contractual documentation, by providing a full service review of the employment status of contractors including assessing current arrangements under which Practising Privileges are granted and monitored, as well as delivering strategic advice on how to best manage any potential risks associated with deemed employment status, managing Practising Privileges and supporting commercial contract review and negotiation.
If you would like to know further how we can support please contact us.