IR35 Changes impacting the housing sector – Are you ready for April 2020?
Are you ready for April 2020?
Ready for what exactly you may ask?
It’s been gathering momentum and following The Government’s announcement in the last week of February, it is all systems go for IR35 as changes go live in the private sector from 6 April 2020.
This impacts on housing associations. Not all, but it will impact those who meet the medium & large test - this looks at total Group turnover (over £10.1m), Balance Sheet (over £5.2m) and employee numbers (over 50). Most housing associations will meet two out of these three tests and therefore will need to take action.
What is IR35?
IR35 is commonly used as the term to signify a review into employment status from a tax perspective.
Under IR35, individuals engaged via personal service companies would be required to pay income tax and NIC on the fees they have received from companies where HMRC deem their role to be one of employment rather than self employment.
This was the personal service company’s obligation and responsibility to settle if HMRC found fault, not the engaging end client company. This structure was therefore used commonly to:
- Reduce costs for the engager;
- Create tax advantages for the worker given they could distribute by way of dividends
- Protect the end client from a HMRC challenge; and
- Enable the worker to be commercial and entrepreneurial.
However given the rise in these types of companies HMRC put the IR35 legislation into place in 2000 to investigate payments that were really in respect of “disguised employment”. HMRC though struggled to investigate these (volume and capacity) and therefore in 2017 introduced new rules into the public sector and these are now being extended to the private sector and housing associations from April 2020.
What is changing?
As above, HMRC has struggled over the years to challenge the employment status of those workers engaged through personal service companies.
Therefore they have changed the rules to make the end client responsible for assessing the employment status of the worker and for any income tax / NIC due. This is a significant change.
Effectively, the end client will help HMRC police this arrangement given that it will no longer be up to the PSC to decide if IR35 applies. Instead of chasing hundreds of thousands of PSCs, HMRC will now only have to go to the larger end client to challenge which will increase transparency and efficiency for the Government, as well as potentially increase PAYE / NIC payments. For reference, it was estimated that an extra £450m has been collected since these rules were introduced into the public sector.
What is not changing
What is not changing is how employment status is assessed. This is being assessed in exactly the same manner as before, using the same factors, including:
- Financial risk
- Part and parcel
- In Business in own account
Therefore, just because the responsible party changes, why should the assessment? There may be an obvious answer to this but it is a key question given that this will change the arrangements in place and add costs to all those in the supply chain as well as change relationships within the supply chain.
What needs to be done?
Three things need to be done to get IR35 ready:
- Train and gain knowledge on the IR35 changes
- Identify engagements within the scope of an IR35 assessment
- Carry out a “Status Determination Statement” (SDS) and provide it to the worker to confirm if they are inside or outside IR35. It will be important to identify a consistent approach to this to demonstrate reasonable care - using HMRC’s CEST online assessment is not mandatory and may not achieve this for you.
If outside, they can continue to be paid off payroll. If inside, the fee payer will need to deduct PAYE and NIC.
We are working with a number of housing associations and can share our experience and help you prepare. One key aspect for the housing sector has been how this change interacts with the Construction Industry Scheme, particularly as we gear up to the Domestic Reverse Charge introduction in October 2020.
Want to know more?
Having worked with housing associations since 1985, Mazars is a leading provider of professional services to the social housing sector.
We provide bespoke tax advice in all areas of taxation, helping clients make properly informed decisions about their tax position.