Tax changes affecting self-employed contractors

From 6 April 2020, employers will be required to undertake an assessment of the employment status of self-employment contractors, and may be required to deduct employment tax at source.

What is the current position?

Under the IR35 legislation, if HMRC determine that an individual should be classed as an employee, HMRC can require payment of employment related taxes from both the individual and the organisation they work for. What is changing is that the burden of undertaking that assessment is shifting to the person contracting with the self-employed individual, i.e. your charity.

Who does this affect?

The change in legislation affects any individual who is self-employed and working through a “personal service company”, as well as individuals providing their services as a sole trader or via a partnership. There are a lot of different words to describe these types of relationship, commonly “contractor” and “consultant” for the individual, and “client” or “customer” for the charity.

Charities of a certain size will need to comply with the obligations described below. There is an exemption for “small” organisations. For a company, such as a CIC, they will be “small” if they have turnover of less than £10.2m, have a balance sheet total of less than £5.1m, and have less than 50 employees. A small company does not need to file audited accounts. For all other organisational structures, including CIOs and trusts, the exemption will apply if turnover is less than £10.2m.

If the charity is not exempt, then they will need to undertake an assessment and may need to deduct employment tax.

What are the obligations on the charity?

Where the charity has a working relationship with someone who is self-employed, they will need to undertake a determination of employment status. This means that the charity will need to work out whether, for tax purposes, the individual working with them should be treated as an employee. HMRC provides a useful online tool for undertaking the assessment which can be found here. HMRC have confirmed that, if completed accurately, they will be bound by the outcome produced by the online tool. Charities should therefore ensure they retain a copy of the online assessment.

If the outcome of the determination is that the individual should be treated as an employee for tax purposes, then the charity will need to enrol them onto payroll, and deduct employment tax and National Insurance from the fee due to the individual. They will also be required to pay employer National Insurance and the apprenticeship levy.

It is important to note that just because an individual is treated as an employee for tax purposes it does not automatically mean that they are classed as an employee for employment law purposes. This is because there are slightly different legal tests for tax and employment rights.

How will this affect charities?

Obviously, the obligation to deduct tax adds to the cost of engaging self-employed contractors. Failure to comply with the new rules when they come into force on 6 April 2020 may also result in enforcement action from HMRC, including fines and penalties for non-compliance.

What can charities do to prepare for the change?

There is still a reasonable amount of time before the changes come into force, however, there is plenty to do now:

  • Review existing relationships with anyone who provides their services on a self-employed basis. If the working relationship is going to continue after 6 April 2020 then it is worthwhile undertaking the employment status assessment now. If that assessment confirms that the individual should be treated as an employee for tax purposes, the charity will need to discuss this with the individual and put steps in place to ensure tax will be deducted. If the individual doesn’t agree with the charity’s assessment, the charity may need to consider giving notice to terminate the contract.
  • Review existing contracts to determine whether the individual’s fee should be renegotiated to adjust for the charity’s tax liabilities, ensuring that the total cost to the charity remains the same after employer tax liabilities are taken into account.
  • Look at existing contracts and precedents to make sure they give the charity the contractual right to make deductions for tax.
  • Ensure that employment status assessments are undertaken and tax liabilities considered before entering into any new contracts with self-employed contractors.
  • Make sure that internal processes are updated to incorporate the new obligations to check employment status, and that relevant members of staff are aware of their duties.

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