New IR35 ‘off-payroll working rules’ due to come into force next year could cause a major increase in employee costs and trigger major cash flow problems for larger companies that routinely use contractors.

Craig Coyle, Tax Partner, says; “From April next year companies who engage workers ‘off-payroll’ and have a turnover of more than £10.2m will have to determine the employment status of that worker and, where required, withhold UK tax and National Insurance from their pay. The IR35 rules are aimed at those individuals working through personal service companies (PSCs) who would otherwise be considered as employees.”

The new rules will apply to companies defined as meeting at least two of the following:

• Turnover in excess of £10.2 million
• £5.1 million or more on the Balance Sheet
• More than 50 employees

Smaller companies operating below these thresholds will not be affected by the increased costs and bureaucracy of administering the new rules.

The new rules will have a significant impact on companies that routinely engage large numbers of contractors. Sectors that commonly engage contracting staff include banking, property and construction, media, entertainment and IT.

In addition to an increased compliance burden, companies will face increased labour costs from Class 1 Secondary National Insurance Contributions. They are also likely to have to face demands from workers for larger payments to protect their take-home pay. Craig Coyle estimates that a contractor previously earning £30,000 a year from a business in a self-employed capacity could cost the business as much as £10,000 in extra charges for income tax, NIC and pension contributions.

The soaring costs to businesses arising from the new rules could encourage behavioural change by businesses to avoid breaching the new thresholds, and hence limit additional income to HMRC and act as a cap on growth.

Craig Coyle says: “There will be a considerable financial incentive to downsize or create new businesses that fall beneath the thresholds and avoid the significant financial bureaucracy and costs of the new rules. We are also unlikely to see a reduction in PSCs as contractors align themselves with SMEs that avoid the new rules. Businesses that grow, or take on substantial contracts, could adapt by creating new corporate entities or separate trading subsidiaries.”

Those companies affected by the new rules will be required to determine the employment status of the worker, however HMRC will decide whether they agree with the assessment made. There are several complex indicators that will guide the decision, including whether the company or the employee provides the tools for the job, how the worker will be paid for their services and their exposure if the company experiences financial problems.

Craig Coyle urges companies to start planning as soon as possible: “These new rules will have a significant impact on the already hard-pressed construction industry, and we would encourage all property and construction businesses to familiarise themselves with the new rules as soon as possible. Those businesses that already fall into the new thresholds should review their contracting arrangements, budget for increased costs and consider alternative methods of engaging with contractors. Failure to comply with the new rules could be costly, or worse.”

It is recommended that you check HMRC’s new online ‘Check Employment Status for Tax’ (CEST) tool, which will allow businesses to determine worker status:

https://www.gov.uk/guidance/check-employment-status-for-tax

If you have any queries, please contact your usual Campbell Dallas advisor.

Craig Coyle - qualified Chartered Tax Advisor and a Chartered Accountant

 
 
 

 

 

Craig Coyle

craig.coyle@campbelldallas.co.uk

0141 886 6644