Change to tax rules for consultants and contractors

The question as to whether a consultant or contractor is to be paid gross or as an employee is under ever increasing spotlight.

The Government are introducing new rules from 6 April concerning those engaged via another entity such as a personal service company (PSC) – the revised IR35 rules. These changes are likely to result in HMRC looking at the position of other individuals being paid gross, not just those using a PSC. 

Individuals directly engaged by the firm and paid gross

As a reminder, where an individual is working directly for an organisation there is long established tax legislation and interpretative tax cases to determine whether that individual should be taxed as an employee of the organisation (operating payroll tax deductions and suffering Employers Social Security charges) or as a self-employed contractor (no tax withholdings and no Social Security charge on the firm).

The new IR35 rules do not change the tax analysis for individuals engaged directly. However given the focus HMRC will apply to this area it would make sense to review the arrangements the firm has with all such directly engaged individuals to see if the circumstances have recently changed. The firm might then wish to record its conclusions so that these are available should HMRC enquire in to the position.

Individuals engaged by the firm via a PSC or other entity

Up until 5 April 2021 the tax status question is for the PSC to answer not the engaging firm. The firm pays gross and under the current IR35 rules the PSC has to determine whether it operates PAYE or not.

From 6 April 2021 the revised IR35 rules will transfer the obligation of determining the tax status to the engaging firm rather than the PSC. The engaging firm may also have responsibility for operating PAYE if relevant.

This applies in situations where the engaging firm is a medium or large entity (if a company or LLP), or if they are a partnership with turnover in excess of £10.2m.

Such firms will need to review their arrangements with each PSC/entity they engage consultants/contractors through AND BY 5 April 2021 issue a Status Determination Statement (SDS) to each outlining whether the arrangements are such that the new IR35 rules apply. If the rules do apply, generally, it will be the responsibility of the entity who pays the PSC to operate PAYE on the payments made.

HMRC offers an online tool – CEST (Check Employment Status for Tax) - that employers can use if they wish in considering the position further – and this can be used whether the individual is engaged directly or via a PSC/entity.