HMRC has announced new rules to target freelancers who operate through personal service companies (“PSCs“) but are in substance working as employees with effect from April 2020. A PSC is typically a private limited company with the freelance contractor as the sole director and shareholder. There has been a rise in the use of PSCs due to businesses preferring flexible staff, and freelancer contractors enjoying the flexibility and tax/lower national insurance contributions (NIC) benefits which PSCs can provide.    

The new rules seek to hold the “Fee Payer” that directly pays the PSC liable in the first instance for unpaid tax and NICs relating to freelance contractors it engages. However, liability may pass up the contractual chain if HMRC is unable to recover from the Fee Payer to the next intermediary and eventually to the business benefitting from the services.  

Will the new rules apply to your business?

Following a similar roll out of the rules in the public sector, the new rules will require businesses with more than 50 employees or a turnover in excess of £10million to verify the status of freelancer contractors; and hold them liable for the unpaid tax and NIC. There will be fines should businesses make a mistake in deciding the freelancers status. The rules do not apply to the estimated 1.5 million businesses below this threshold. The new rules are not likely to be retrospective.

When does the change come into effect?

This changes will operate from April 2020. HMRC have acknowledged in a consultation document that a “considerable proportion of public authorities did experience early difficulties in complying with the reform“. This may explain why HMRC has delayed the implementation of the measure for private businesses. 

The response

The measure has provoked much controversy and HMRC’s own tool for assessing employment vs self-employed status (Check for Employment Status for Tax, CEST) is widely perceived as oversimplified (with just 16 questions) and having an inbuilt bias towards the subject paying higher taxes. 

Commercial impact – what does this mean for your business?

The new rules will impact on engagement of freelancers and associated supply chains. 

Businesses such as digital creative agencies which rely heavily on freelancers will have to reconsider this dependency and may elect to use the same freelancers less frequently for example. Many of these businesses use freelancers via agencies who in turn contract with freelancers.  These agencies are highly likely to be caught by the new rules, which could mean digital creative agencies seek to contract more directly with freelancers causing a larger contractual and administrative burden.  Given the HMRC’s ability to recover up the supply chain, businesses which use freelancers and are caught by the new rules should employ more robust supply chain processes and due diligence.  

How can your business prepare? 

Businesses should consider reviewing their strategy and arrangements for the impacts the new rules will have on they way they engage with freelancers and agencies and prepare suitable strategies for the way they engage freelancers and manage their supply chain in the future. 

How can Steer & Co help you?

We have experience in advising clients who will be affected by these new rules to prepare a strategy appropriate for their business and supply chains.  Due to similarity of advice to certain clients in the creative digital and tech sectors, we are offering discounted workshops to support clients with this process and work alongside your existing HR, finance teams and advisors to help implement and roll out changes to your processes and contractual agreements.  

For more information or advice on IR35, please contact Rebecca Steer rebecca.steer@steerandco.com.

Rebecca is due to be speaking on this topic – dates will be announced in due course. 

For more useful links or information:

The Consultation on Off-payroll working rules from April 2020: https://www.gov.uk/government/consultations/off-payroll-working-rules-from-april-2020

CEST: https://www.gov.uk/guidance/check-employment-status-for-tax