IR35 Changes – Off Payroll Working for the Private Sector
Average read time: 5 minutes.
What is off payroll working?
Off payroll working is basically where a business engages with workers via a personal service company or similar intermediary (PSC).
What is IR35?
IR35 is designed to prevent tax avoidance by workers who provide their services to a business via a PSC but would otherwise be engaged by that business as an employee.
What is changing?
Up until 6 April 2020, the requirement to check the need to operate PAYE rests with the PSC/intermediary. However, from 6 April 2020 all this changes and the private sector will be required to fall into line with the 2017 changes that were applied to the public sector. This will mean that it is the engaging company (not the individual) who is responsible for determining the worker's employment status.
The impact of IR35 is that all UK contractors who are caught by it will be required to pay equivalent PAYE and NI contributions as they would if they were an employee of the company which engages them.
HMRC are of the opinion that only 10% of PSCs correctly complied with their responsibilities and that this was costing the Treasury as much as £1.3bn in lost income tax and (primarily) NI contributions.
Who does it affect?
Small companies are not within the legislation. To be a small company, two of the following conditions must be met:
- an annual turnover of not more than £10.2m
- a balance sheet total of not more than £5.1m
- no more than 50 employees.
If these conditions are not met in two consecutive years, the company will cease to be small and it must apply the new off-payroll working rules from the start of the tax year following the filing date when the company is no longer “small”.
For unincorporated engagers of PSCs, HMRC has accepted that an organisation will be "small" if turnover does not exceed £10.2m in any calendar year. Although this is a simpler test, it might result in the organisation needing to keep separate records of turnover on a calendar year basis in addition to the "normal" accounts year basis.
What do the changes mean?
The new rules require private sector organisations, which engage workers via a PSC, to undertake checks to determine whether the worker should be treated as an employee or as self-employed for tax purposes. The route for ascertaining the position will usually be by the use of the HMRC online "Check Employment Status Tool".
Once a determination has been reached by the engager, details of the determination have to be passed down the contractual chain to each party involved. Additionally a copy of the determination needs to be provided directly to the worker.
This may throw up some data privacy issues that will need to be addressed by the engager if there is more than one intermediate agency.
If the engager and the provider disagree with the determination, HMRC will not get involved and they have stated that the parties need to reach agreement between themselves. Basically HMRC does not have the resources to properly police this, and they will rely instead on compliance by the engagers aided by the risk of financial penalties if the engagers get it wrong.
Engagers will therefore need to put in place some robust "status disagreement process" to reach a decision. The engager has 45 days in which to respond to any disagreement to a determination disagreement. Failure to deal with a disagreement could result in the engager becoming liable to any tax and national insurance arising.
What happens if you get it wrong?
As mentioned above, if you fail to deal with a status disagreement, the engager could become liable for all tax and national insurance.
Where a worker is provided through a labour supply chain and obligation to operate PAYE and NIC arises – but an intermediary fails to operate them – the first intermediary who engages with the end client will be liable for the debt. HMRC has stated that it will only use those powers in the cases of deliberate default or structured tax avoidance and guidance is expected to be published by HMRC to provide more clarity on where it will use these powers.
What should you do?
In short, start to prepare for the IR35 changes NOW if you have not already started.
- Look at your current workforce (including those engaged through agencies and other intermediaries) to identify those individuals who are supplying their services through PSCs;
- Check your internal resources and provide training if required. Be aware of the proposed practical issues around notification of status determinations, supply of reasons and be alert to the requirement to adhere to a “status disagreement process”;
- Review existing contracts to identify which arrangements are likely to be caught – use the CEST;
- Calculate the additional cost of employers’ NICs (and the effect on the Apprenticeship Levy if applicable);
- Consider engaging workers directly (as employees) instead. However, note that workers engaged directly would benefit from additional employment benefits, such as national minimum wage, paid annual leave, pension entitlement and protection from unlawful deductions from wages. If the individual was to be viewed as an employee this would bring with it significant additional rights and protections for them. The wider financial impact of employing former contractors will therefore need to be considered.
The new legislation may not be operative until 6 April 2020 but if you engage workers or are engaged as a worker via a PSC, steps need to be taken sooner rather than later to ascertain the potential implications of the new legislation and if necessary to go through the disagreement process.
You may also need to consider the contracts that are already in place. Are they fit for purposes and do they accurately reflect the reality of the engagement?
The main point to take away is not to bury one's head in the sand but to act now to address any issues that may arise and to be ready for the changes on 6 April 2020.
For more information please contact Brian Garner.
This article is for general information only and does not, and is not intended to, amount to legal advice and should not be relied upon as such. If you have any questions relating to your particular circumstances, you should seek independent legal advice.