Do you need to prepare for off-payroll working (IR35)?

*UPDATE: reforms to the off-payroll working rules have been delayed by one year* 

Off-payroll working will be a major change for the largest charities when it is introduced in April 2020. Affected charities should already be preparing for this important change. Full detailed guidance can be found here. Below is an extract from an article for the Charity Finance Yearbook by CTG Vice-Chairman Richard Bray.

The new rules will mean that operating IR35 becomes the responsibility of the organisation, not the worker’s personal services company. The rules will only apply to larger organisations that meet two of the three following criteria:

  • turnover above £10.2m (defined as sales of goods and services and so excluding donations and other voluntary income)
  • a balance sheet total over £5.1m
  • 50 or more employees.

Organisations that meet these criteria will have to evaluate the status of all the intermediaries providing services to them through personal service companies.   This will determine whether they are to be treated for tax purposes as being employed or self-employed. If they are found to be acting like employees, then the organisation must operate PAYE and Class 1 NI on the net value of the invoice raised by the intermediary and include their details on their payroll system (and account for the Apprenticeship Levy where relevant). The organisation is also required to share a copy of their evaluation with the intermediary, who has the right of appeal against the decision.

It would be wise for affected charities to get in touch with their payroll system provider. What are they doing to ensure that a charity’s systems will be ready for the change and how do they expect this to operate? A further complication is that the personal service company is likely to continue issuing invoices as it has before. These will generally include VAT. So, changes will be required to accounts payable systems which will presumably pay the VAT whilst the net value of the invoice will, in effect, be processed by your payroll system. How will this work?  My plea is simply that we all make the most of the time given to us to plan for the impact of off payroll working.

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.