The government has announced that the reform of the off-payroll working rules (otherwise known as IR35) introduced for engagements in the public sector will be extended to the private sector with effect from 6 April 2020.
A year may seem a long time away. However, it is important for businesses to get to grips with the forthcoming changes now to mitigate against any impact, as feedback from the public sector, when reform of the rules was introduced, showed that preparing for the changes was time consuming. In order that businesses have time to prepare and implement the reform, the government decided to delay implementation until 2020.
Off-payroll working rules were introduced to tackle perceived tax avoidance where individuals supply their services through an intermediary (usually a personal service company or PSC) and pay themselves in dividends, thus seeking to avoid income tax and national insurance contributions.
Medium and large companies in the private sector that contract with PSC’s for the provision of workers’ services will have to account for tax and national insurance through PAYE in the same way as the public sector. Small companies will not be affected by the reform. The government intends to use the existing statutory definition within the Companies Act 2006 to determine whether an organisation is small. A company is small if it satisfies two or more of the following criteria: (i) its annual turnover is not more than £10.2m; (ii) the balance sheet total is not more than £5.1m; and/or (iii) the number of employees is not more than 50.
What does this mean?
The off-payroll working rules apply where an individual (the worker) provides their services through an intermediary to another person or entity (company).
From 6 April 2020, if your company engages an individual via a PSC, your company will be responsible for deciding whether the worker, if the PSC was hypothetically not there, would be an employee of your company; applying the normal employment status tests. If yes, your company will be treated as the worker’s employer for tax and NIC purposes.
This means that the fee-payer (your company, an agency or a third party) responsible for paying the PSC will need to deduct income tax and primary Class 1 NICs from the fee. The fee payer cannot lawfully deduct the secondary Class 1 (employer’s) NICs from a fee that has been agreed. The fee payer will need to account for and pay tax and NICs to HM Revenue and Customs (HMRC).
Strictly speaking, the IR35 rules apply to an individual’s status for tax purposes only. However, the question of whether an individual worker is an employee or not has ramifications beyond the issue of tax. Employees have far more statutory rights than other workers. There has recently been considerable focus on employment status with several high-profile cases where individuals have challenged their status.
Further, the government last year issued its Good Work Plan setting out its “vision for the future of the UK labour market”. The government recognised that having a separate framework for tax and employment status was confusing and they are looking to align employment status tests for tax and employment status purposes.
Since announcing the reform, the government has issued a consultation document on how best to implement the new rules (at https://www.gov.uk/government/consultations/off-payroll-working-rules-from-april-2020)
Consultation closes on 28 May 2019.
The consultation paper sets out proposals on how the rules should be refined to address concerns about how IR35 is operating in the public sector, including:
- Making the company responsible for informing the person they contract with and the off-payroll worker of its status determination and, if requested, the reasons for that determination. All recipients are required to pass the status determination and any reasons for the determination down to the person with whom they contract. This is to ensure that the determination reaches the fee payer where there are long supply chains.
- In the event of non-compliance, the government proposes that the liability for any payments will rest with the party who has failed to comply with its obligations. However, if HMRC were unable to collect the outstanding liability from that party the liability could potentially transfer to your company (if it is not already the fee-payer). If implemented this creates additional risks for those dealing with PSCs.
- HMRC has made clear that the company should not make blanket status determinations but should give due consideration to each engagement. To help make determinations, the government has an online Check Employment Status for Tax (CEST) service. If the CEST tool identifies the worker as employed for tax purposes, the fee-payer will need to deduct and account for the appropriate tax and NICs. There has been criticism of how accurate the CEST service is as some key factors in determining employment status are missing. HMRC in response has said it will explore where CEST can be improved and will ensure that any enhancements are introduced before the introduction of the new rules.
- The government understands that an off-payroll worker and/or fee-payer may disagree with your company’s status determination. It is therefore suggesting that companies develop and implement processes to resolve disagreements. If implemented your company would need to set up a process for resolving disagreements.
We suggest that your company should take the following steps in preparation of the new rules:
- For those engaging an individual via a PSC, carry out an audit to determine how many may be affected by the new rules and consider whether you want to change how workers are engaged. Not only from an IR35 perspective, but to mitigate against possible changes to employment status mentioned above.
- Review internal systems and processes and consider whether any will need to change to accommodate the new rules, e.g. HR and on-boarding policies, invoicing or payments.
- Decide who will be responsible for determining employment status and ensure they receive training on the IR35 rules and how to determine employment status. Put in place systems for documenting employment status and the reasons for how that determination was made.
- In view of the cost implications, e.g. payment of employer Class 1 NICs for the fee payer, possible increased tax on contractors and potential liability on non-compliance, review the terms of existing contracts.
- Draft contracts in such a way as to reduce the risk of a worker being held to be an employee and the risk of IR35 applying. Whilst this is important, it is clear from case law that this is not determinative to actual status. It is important that the practical reality is in accordance with those terms.
Contract between your company and the intermediary
The contract with the intermediary is probably the more important contract, as it is the one that is likely to get more attention in any HMRC investigation. Some or all of the following points below should be considered, weighed against commercial requirements.
- Include a right of substitution in a contract. It should not be subject to a wide veto on your part, such that effectively the worker has no right of substitution.
- Avoid an obligation to provide and accept work.
- Contracts should be structured, if possible, on completion of a project or piece of work, rather than duration. Similarly, payment should be referenced to completion of a project, rather than hours worked. Some element of financial risk and reward should be incorporated into the contract, e.g. penalties or bonuses for late or early completion.
- Where possible, require the worker to maintain insurance in respect of claims arising out of the services provided.
- Focus on what the worker is engaged to do, e.g. specific tasks, standards and deadlines, rather than how the work should be done. Where possible allow the worker the freedom to determine their own hours. The worker should be subject to as little control as possible.
- If possible, require the worker to provide their own equipment.
- Avoid using a PSC arrangement to cover jobs which could be done by an employee. The worker should not be integrated into your company, e.g. they should not be subject to its policies or procedures, they should not be entitled to participate in any employment-related benefits or held out as an employee.
Finally, keep the engagements under review. Relationships should be assessed on an ongoing basis. Therefore, it is important to ensure that the nature of the relationship does not change over time.
If you require advice or assistance on drafting contracts, determining employment status or about anything covered above, please contact a member of the employment team on 01473 556900 or 01206 764477 or at [email protected].