IR35 and Private Businesses – 2020 changes

For several years IR35 tax rules on whether a worker is legally self employed have been enforced on public bodies such as local councils, but as of April 2020 the rules will also apply to private companies. This means you should look now at your consultancy contracts to ensure you do not fall foul of the new rules. If a consultant is found to be an employee by HMRC for tax purposes, any consultancy fees paid directly to that individual will be subject to income tax and National Insurance contributions (NICs). As a business engaging that individual, you would be required to deduct tax and NICs under PAYE. If the individual is accepted by HMRC as being a consultant, then the consultant will be required to account for their own tax via self-assessment. Matters become more complicated when a consultant seeks to provide their services via a personal service company (the consultant will generally be the sole director and shareholder of such company). This is where IR35 or the “off-payroll working rules” come into play. In short, IR35 seeks to crack down on personal service companies being used to reduce the tax and National Insurance liabilities for both parties in circumstance where the consultant is not genuinely self-employed. Whilst the rules aren’t new, an important change takes effect in April 2020 which medium and large private sector businesses need to be aware of. A business will be large/medium sized if it meets two or more of the following: over 50 employees; net turnover over £10.2 million or a balance sheet of over £5.1 million. The following example illustrates the change taking effect in April 2020: Andy Brown works for ABC Company Limited. He provides his services via his personal service company XYZ Services Limited. Andy works at ABC’s premises for 40 hours a week and does not provide services to any other business. He has an ABC email address, he wears an ABC branded polo shirt and is subject to the same management regulations as an ABC employee. Andy does the same role as five other individuals who are employed directly by ABC. In this scenario, it is likely that Andy wouldn’t be regarded as genuinely self-employed and that, had he been engaged directly by ABC, he would have been classed as an employee for tax purposes (and therefore subject to PAYE). Under the current regime, the responsibility to account for tax and National Insurance contributions lies with XYZ not ABC. From April 2020, however, this is going to change so that this responsibility shifts to ABC. Assuming that the arrangement falls foul of IR35, from April 2020, ABC will need to make deductions for tax and National Insurance from the consultancy fees they pay to XYZ. Where businesses do engage consultants via personal service companies, we would recommend that you start to review these arrangements now to determine whether or not contractual documentation needs to be updated; whether or not you need to be deducting tax at source and, more generally, whether you need to re-consider the structure of your workforce. Is there an exclusive relationship? A question which often comes up is, ‘can we stop the consultant from working elsewhere?’. A blanket ban on a consultant from working elsewhere is likely to be an indicator of an employment relationship rather than evidence of genuine self-employment (think of Harry and his 40 hours a week!). For that reason, an absolute exclusivity clause is generally not recommended. That said, businesses should consider whether it would be appropriate to consider a middle ground which allows the consultant to provide their services to other businesses, provided that those other businesses aren’t competitors. Post-termination restrictions Another tricky area is post-termination restrictive covenants. Such clauses aim to restrict an individual’s ability to work after their consultancy has ended with a view to preventing damage to their former client’s business. A typical restrictive covenant may, for example, seek to prevent an individual from contacting  former customers or clients for a number of months after their consultancy ended. Businesses cannot, however, seek to restrict the activities of former consultants without careful consideration. In order to be enforceable, restrictive covenants need to protect a legitimate business interest and go no further than is reasonably necessary to protect that interest. If a consultant hasn’t had access to clients whilst working for you, a covenant restricting dealings with them is unlikely to get off the ground. If, as a business, you are concerned about the risk which a consultant could pose post-termination, we recommend that you get in touch and seek specific advice on the drafting of the requisite restrictions. Unfortunately, you don’t get a second bite of the cherry so, if the restrictions aren’t right at the point at which they are entered into, you can’t simply redraft them. Is the consultant a commercial agent? Whilst it’s not a particularly common scenario, it is possible that a consultant will fall with the scope of the Commercial Agents Regulations 1993 and this is often something which gets overlooked. If an individual is deemed to be a commercial agent, then both parties will be subject to certain duties and obligations which can’t be contracted out of. For businesses, this can involve paying out considerable compensation on termination of the agreement. If the consultant is going to be involved in the sale or purchase of goods on behalf of the business, we would recommend that specialist advice be sought to check whether or not the regulations are likely to apply and the implications of this. If you are seeking further information or advice about any of the above, please contact John on 08006990556. Disclaimer: this briefing is for guidance purposes only. We accept no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client’s own particular circumstances.
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