New rules for personal service companies

The 2018 Autumn Budget announced changes to the ‘off-payroll’ working (or ‘IR35’) rules, which are set to apply from April 2020. This may affect you if you work on a contract through a personal service company (PSC) in the private sector, or hire or place such workers. Similar rules already apply in the public sector.

The IR35 rules aim to prevent the avoidance of tax and national insurance contributions (NICs), where an individual works for a client through an intermediary (usually a PSC) and the use of the intermediary means that they avoid being taxed as the client’s employee.

Currently, responsibility for deciding whether the IR35 rules apply to a private sector contract lies with the intermediary. If IR35 applies, the intermediary also has to account for PAYE and NICs on the fees received.

From 6 April 2020, responsibility for deciding employment status is set to pass from the intermediary to the party engaging the worker. If IR35 applies, the business, agency or third party paying the intermediary must deduct income tax and employee NICs and become liable for employer NICs.

HMRC has an online Check Employment Status for Tax (CEST) tool to help decide whether the off-payroll working rules apply to any given contract: https://www.gov.uk/guidance/check-employment-status-for-tax. The tool can be used by workers, hirers or agencies placing a worker. HMRC will stand by the result, unless a compliance check finds that information supplied was inaccurate.

The service can be used anonymously and will not store any personal details or findings. However, the result can be printed, which is essential. If there are changes to the working arrangement, we would recommend that you run the new details through the check again.

It is important to note that problems regarding employment status do arise in practice, even when the tool is used, and HMRC has stated that it is committed to improving CEST’s usefulness.

Some aspects of the forthcoming change also remain to be clarified and government consultation is ongoing. The change will affect employing businesses which are classed as ‘medium and large businesses’, but not ‘small’ ones; the definition of small will be based on the Companies Act 2006 definition of a small company.

The government has issued a welcome assurance that the change is not retrospective. Where someone starts paying employment taxes under IR35 for the first time, or where a business decides that a worker should come within the rules, this will not automatically trigger an enquiry into earlier years.

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