For over 20 years the government has viewed independent contractors as tax avoiders if they work through their own Personal Service Company (PSC). This is why the IR35 rules were put in place – to get the contractor to pay approximately the same tax and NIC as an employee – if they work under conditions identical to the employees of their customer (the engager).
In truth, the IR35 rules are frequently ignored, as in the private sector it has been up to contractors to apply the rules to themselves. In the public sector, since April 2017, the engager has had to decide whether the contract is effectively one of employment and thus whether tax and NIC should be deducted under PAYE.
From 6 April 2020, large engagers in the private sector will have to determine the employment status of their contractors and thus whether to apply payroll taxes. The engager must issue an employment status determination for each contract worked by a freelance contractor.
This decision will be passed down the chain of agencies until it reaches the contractor. In this way, each link in the chain should be informed of the engager’s decision about the contractor’s status.
As a contractor you can object to the employment status decision, giving reasons, and the engager has 45 days to respond. Meanwhile if the engager has decided that the off-payroll rules apply, it must continue to deduct tax and NIC from your fee.
Small private sector engagers won’t be required to apply these rules to their contractors. In those cases, contractors will carry on making that IR35 decision for each contract, as they do now.
For these purposes a small engager is one that meets at least two of these conditions for the accounting period ending in the previous tax year:
- less than £10.2m turnover
- less than £5.1m balance sheet value
- no more than 50 employees