The government has confirmed changes to off-payroll working (IR35) rules, which will come into play from 6th April 2020. The new tax legislation will affect the private sector, including numerous charities and not-for-profit organisations, and could result in contractors paying 25% more in tax.
The last changes to IR35 were introduced in April 2017 and were rolled out to the public sector to combat avoidance of employment tax and National Insurance contributions by contractors who chose to provide their professional services through an intemediary company, such as personal service or limited companies. Essentially, it was a way to prevent workers from "disguising" themselves as freelance contractors as a way to pay less tax, when in practice they are performing the same role as full-time employees.
Previously, IR35 only applied to the public sector, meaning the majority of charities were not affected by the tax legislation rules - with the exception of high profile not-for-profit organisations including many universities, museums and public bodies. However, a significant number of charities and not-for-profit organisations will need to take action before the 6th April to comply with the requirements of the new IR35 rules.
Until now in the third sector, it has been the contractor's responsibility to determine whether they fall within IR35. However, with the extension or IR35 to the private and voluntary sectors in a couple of months time, employers will be responsible for assessing whether contractors need to pay income tax and national insurance contributions. In a nutshell, as explained by Seb Maley, the Chief Executive of IR35 Adviser and Insurance Company Qdos Contractor, "contractors will not be able to set their own tax status unless they are engages by a 'small' or private sector company. This duty will fall on the medium or large business they are engaged by".
Going forward, charities will no longer be able to assume that because they engage a contractor via a limited company that they can pay that company gross for the contractor's services. Instead, charities will need to consider whether the contractor is working in an employee capacity or only for specific projects. If working in an employee capacity, contractors will need to be pay the same PAYE tax as an ordinary full-time employee - in reality, this will include anyone who is employed to cover holiday, maternity or sick leave. Those who are employed to work on specific projects will retain the right to be paid outside of the IR35 rules.
Charities and not-for-profits must meet two of the three thresholds over two accounting periods to fall under the new IR35 rules. These thresholds are an annual turnover of £10.2 million or more, a balance sheet total of more than £5.1 million, and having over 50 employees. The Charity Tax Group (CTG) has warned that charities need to be aware of the rule change, as even if they do not fall within the turnover threshold they may meet the other two. Richard Bray, Vice Chairman at the CTG and Finance Regulatory & Taxes Manager at Cancer Research UK has said "it is also important to appreciate that these changes are not about tax compliance alone, but could result in significant increases in a charity's cost base". For example, the new rules could mean that a charity needs to allocate extra costs to update and improve its payroll systems.
These new tax legislation rules have left some contractors worried that companies will take a risk-averse approach to IR35 and unfairly or inaccurately place them inside IR35, meaning they will pay more tax. Before the new IR35 rules are rolled out on the 6th April this year, charities and not-for-profits will need to assess their relationships with personal service companies, and ensure that they are paying their contractors in the correct way and deducting PAYE in line with HMRC rules.