Changes to IR35 and Personal Service Companies (PSC’s)

There were changes introduced into the Public Sector relating to the IR35 rules which came into force 6 April 2017. The changes switched the onus from the PSC to the Public sector engager to decide if IR35 should be applied. If the Public sector body decided that IR35 should be applied, then they had a responsibility to ensure that PAYE and National Insurance (NI) was deducted from the payments made to the PSC.

The Public sector changes generated an extra £550 million in revenue according to HMRC figures. Little wonder then that it is planned to introduce these changes into the private sector, where HMRC estimates of additional revenue is in the region of £1.5 Billion. One wonders if that is netted off with a reduction in corporation tax…

The changes are due to be introduced 5 April 2020 unless HMRC are too busy dealing with Brexit legislation.

What will happen?

If your private sector engager is not a small company (the changes do not relate to small companies meeting the Companies House small companies criteria), they will be required to consider your contract and actual work practices, hopefully the same, and decide if in their opinion you are actually a disguised employee.

The engager will then have to issue you with a Status Determination Statement (SDS) which informs the PSC of their decision.

The PSC will then have the opportunity to appeal the SDS decision and ask specific questions as to why the private sector engager considers the PSC caught by the legislation.

The private company will then have 45 days to reply to the PSC’s specific questions.

If after appeal the private company still considers the PSC caught, they will instruct the fee payer to deduct PAYE and NI from payments to the PSC.

What can PSC’s do in preparation for the changes?

In preparation for the changes, PSC’s can take the follow action:

• Have your contract reviewed by an expert if it is likely to continue post 6 April 2020. You ask for specific reasons as to why the reviewer has come to their decision.
• You can go onto the HMRC website https://www.gov.uk/guidance/check-employment-status-for-tax and run your current contract through the Check Employment Status for Tax (CEST) online tool. Remember this is stacked in HMRC favour so it may not be the be all and end all HMRC may think it is. Cases have been won where the CEST tool gave an employed decision.
• Consider retirement! I know I am!
• Perhaps write to your end user client and request they look at your contract now. If you have a substitution clause in the contract, ask them if they would really accept a substitute as stated in the contract.  Does the contract state you are not controlled and decide the manner in which you undertake the contract work, would the client agree with this?  Just because it states it in the contract, it does not mean it is true!

You may well be hearing from your client shortly, they may well be informing you of their position. This may require you to provide your services through an Umbrella company if they want to continue to use contractors. They may well be offering you a position on an employed basis.

Some of the larger private companies have already declared that they will not be using contractors in the future and instead will be employing staff on a PAYE basis. The potential penalties for getting this wrong and the potential extra work from replying to a mountain of SDS PSC queries could well put off a large number of private companies.

Is this the end of contracting through a PSC? Who knows, but it will certainly see a considerable reduction in this method of working.

If you would like additional information on the IR35 changes or a contract review status review, please contact Duncan Forsyth at Duncan.forsyth@lambert-chapman.co.uk.