Tax reforms – (1) employment status and (2) termination payments

The government are set to introduce new rules which will have an impact on the tax reforms to the IR35 rules and termination payments.   

IR35 Status

For some time now there have been calls for HMRC to clarify the rules that apply to a self-employed contractor operating through an intermediary, such as a limited company. There is uncertainty based on the fact that HMRC has determined that in some circumstances, if it was not for that intermediary, the contractor should be classed as an employee. 

The government has introduced some guidance surrounding the changes they propose to make which will be effective from 6th April 2020. 

What are the proposed changes?

Currently, the responsibility lies with the self-employed contractor to determine their employment status when they are engaging in the labour market. 

From April 2020, if you use contractors and your organisation falls into one of the categories below, you will be responsible for determining the employment status of your off-payroll workers. These categories are: 

  • All public sector bodies; 
  • Medium sized private sector organisations; and 
  • Large sizes private sector organisations. 

Charities, schools, colleges and professional practices will also fall within the group above and they too will be responsible for determining their employment status. 

To be considered as a small company for the purposes of this new law, you will need to meet 2 of the following criteria: 

  • You must have an annual turnover of less than £10.2 million; 
  • Your balance sheet should total less than £5.1 million; 
  • You have less than 50 employees. 

If you satisfy the conditions above, then you will be considered as a small private sector company and the new proposed rules will not apply to you. 

How should I prepare for the new rules? 

  1. Be prepared and start reviewing the employment status of your contractors now!  
  2. Give the individuals who you deem to be contractors and workers a status determination statement. 
  3. Ensure you keep your records updated about the employment status and keep a record of the fees which you have paid to the contractors;
  4. Have policies and procedures in place to deal with disputes which could arise from your employment status determination. This includes keeping records of why you have determined your contractor’s employment status and inform the worker if you have determined their employment status to be different.

Changes to termination payments 

Termination payments are usually made when an employer and employee have entered into a settlement agreement. The government have passed a new rule, which will come into force from April 2020. This new rule will mean that there will be a 13.8% levy placed on the employer for national insurance contributions on termination payments which exceed £30,000. This charge will be applicable if the employee who is a party to the settlement agreement, it is not of pensionable age. 

The existing rule that the first £30,000 of a termination payment will be tax free still remains. The new rule which will come into force is that the 13.8% national insurance contributions will also apply for sportspeople if their payment is in excess of £100,000. 

If you are feeling overwhelmed or out of your depth when preparing for these new rules, contact us for some assistance. You can call us on 0115 870 0150 or email us at hello@yourhrlawyer.co.uk.

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