Clear warning to businesses to prepare for IR35 changes now

Four actions that business should take to prepare for the reforms were listed in the consultation document. These include: identifying and reviewing "current engagements with intermediaries", including personal service companies (PSCs) and labour supply agencies, and putting in place "comprehensive" processes to determine the employment status of contractors.

HMRC is consulting on how new rules that will make businesses liable for the employment tax status of contractors who work through PSCs will operate once they are extended to the private sector in April 2020.

Tax Expert Penny Simmons of Pinsent Masons, the law firm behind Out-law.com, said: "The consultation document couldn't have been clearer that businesses should not be waiting until April 2020 to prepare for the changes and that they can expect HMRC to begin robustly reviewing compliance as soon as the new rules become law."

"Once a business has identified the PSCs that it currently engages with, it needs to undertake a comprehensive risk assessment to establish its exposure to IR35 and to review whether changes need to be made to HR and procurement processes when engaging with contractors through PSCs," Simmons said

The government confirmed as part of the autumn Budget that it would, from April 2020, extend the off-payroll employment tax rules which came into force for public sector employers in April 2017 to the private sector. Small businesses will be exempt from the changes, and the reforms will not operate retrospectively.

Tax rules known as IR35 require that employment taxes be paid by people who provide services through PSCs if that person would otherwise have been regarded as an employee of the engaging business. Currently, where a private sector business engages a contractor through a PSC, liability to decide whether IR35 applies and to pay any employment taxes rests with the PSC. Once the new regime is in force, the engaging business will be liable for determining whether the IR35 rules apply and will also be required to operate PAYE and pay employers' National Insurance contributions (NICs).

In its consultation HMRC also recommends that businesses should also start reviewing internal systems such as payroll software, process maps, HR and on-boarding policies to see if they need to make any changes.

"Identifying and reviewing engagements with off-payroll workers is going to be a lengthy and costly process for businesses engaging large numbers of contractors through PSCs. The financial impact is expected to be particularly onerous for businesses operating in the infrastructure and energy sectors where profit margins are often very slim and there is heavy reliance on a flexible workforce," Simmons said.