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New off-payroll working rules (IR35) – what your charity needs to do before April 2020.

From April 2020, new rules will be introduced for organisations who pay contractors using personal service companies. This will affect many charities and action should be taken now, before the rules take effect, to minimise exposure and employment tax liabilities.

What are the off-payroll working rules?

The off-payroll working rules (commonly known as IR35) were designed to stop the avoidance of payroll taxes where a client pays a worker via the worker’s personal service company (for example, where ABC Charity pays Purple Limited, which is owned by Mr Purple, for Mr Purple’s work). Historically, responsibility for IR35 rules has fallen on the personal service company and not the client.

In 2017, new rules were introduced that affected organisations meeting the definition of ‘public authorities’. These public authorities were required to assess whether their contracts fall under the IR35 rules, and implement payroll deductions where the rules apply.

With effect from April 2020, this responsibility will be expanded to cover many private sector charities and other organisations, as well as introducing new compliance requirements that will affect both public authorities and many other organisations.

Who is affected by the new changes?

There are two types of organisation affected by the new rules.

1. Public authorities

A public authority is any entity that is defined as such under the Freedom of Information Act 2000. This includes various bodies connected with local government, the NHS, education services and the police.

Public authorities (whether large, medium or small entities) are already required (since 2017) to operate payroll for any workers caught by the IR35 rules, but from April 2020 must comply with a new process as relayed later in this article.

2. Other large and medium size entities

An incorporated entity is large or medium if any two of the following apply:

  • Annual turnover (excluding donations and voluntary income): more than £10.2m
  • Balance sheet total: more than £5.1m
  • Average number of employees: more than 50

An unincorporated entity (such as a charitable trust) is medium or large if its annual turnover (excluding donations and voluntary income) exceeds £10.2m.

What are the new requirements?

Charities and organisations caught by the new rules must review each of their contracts to determine whether or not the IR35 rules apply. The charity must prepare a ‘Status Determination Statement’ (SDS) which explains the charity’s determination and the reason for that determination. The SDS must then be given to the worker and their personal service company (or if contracting with an agency, to that agency).

If the outcome of the SDS is that the IR35 rules apply, then the worker must go onto the charity’s payroll with tax and NICs deducted, before the net payment is made to the worker’s personal service company. 

Depending on the contracts, it may be an agency in the chain which applies the payroll, but the charity must still issue an SDS and ultimate responsibility for the employment tax could fall back to the charity, if the agency does not properly administer the payroll.

The charity is also required to establish a disagreement process for any workers that wish to challenge the SDS they have been sent.

How do we determine whether IR35 applies?

Employment status under IR35 is determined by a wide range of factors such as control, substitution, integration and financial risk. There is often not a clear answer to whether a worker falls within IR35.

A useful starting point would be to use HMRC’s online Check Employment Status for Tax (CEST) tool, updated in November 2019 in preparation for the new rules. This tool is not definitive and it may be worth seeking further professional advice on uncertain engagements, but in many cases the CEST will be sufficient and the outcome of the CEST should be documented to support your SDS.

What action should be taken before April 2020?

Charities should take action now before the rules come into place. We recommend carrying out the following steps:

  • Establish a policy and process for reviewing contracts under IR35 rules and issuing the SDS to the workers
  • Carry out a preliminary review of all existing contracts that are expected to be ongoing in April 2020
  • Ensure that the charity’s payroll system is ready to implement the IR35 rules.

The new IR35 rules are an opportunity for charities to review their arrangements with contractors. For example, paying a contractor for output with a fixed fee (rather than a daily or hourly rate) is one way the arrangement could be less likely to fall within IR35 as well as being more efficient commercially for the charity.

Our tax and HR consultancy experts can help structure your arrangements and ensure that your charity is compliant.

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