News and insights from our Private Client team
Proposed off-payroll working changes
- AuthorCarolyn Byrne
Whilst the uncertainties and dramas surrounding Brexit seem to be dominating the attention of Parliament (and the headlines!), in the background the draft Finance Bill 2019/20 is slowly making the rounds. The bill contains important changes to off-payroll working rules – more commonly known as IR35 – which are likely to have a significant impact on many employers.
How did we get here?
The IR35 rules were originally introduced by HM Revenue & Customs (HMRC) in 2000 in order to try and eliminate the tax and National Insurance Contributions (NIC) advantages available to individuals working in the same manner as other employees, but via their personal limited company. Such companies are often referred to as a Personal Service Company (PSC) and effectively avoided the individual being taxed as an employee.
If the IR35 rules apply to a contract, the PSC must calculate the appropriate tax and NIC as though the worker was employed and to pay the resulting liabilities to HMRC. This can significantly reduce the net income available to a worker compared with a contract where IR35 did not apply.
Non-compliance with the IR35 rules was widespread and a discussion document issued by HMRC in July 2015 estimated the cost to the Exchequer for that tax year to be £430M in tax and NIC. Since that time, HMRC have been seeking to tighten up the IR35 rules and, as a result of the 2015 discussion document, the March 2016 Budget contained proposals to clamp down on IR35 working within public sector organisations.
These changes came into effect from 6 April 2017, and whilst they did not include any new PAYE or NIC liabilities, they did aim to increase compliance with the existing rules. Under the new legislation, rather than the PSC (or agency if the contract was via an agent) deciding if IR35 was applicable, it was now the engager who was responsible for deciding if the rules applied to a particular contract. If IR35 did apply, then the public sector engaging company was treated as the employer and was responsible for deducting PAYE and NIC from the payment to the PSC and reporting the deductions to HMRC via their own payroll. The deductions would include Employer’s NIC.
New year – new rules
With effect from 6 April 2020 these responsibilities are to be extended to include medium and large businesses in the private sector. The self-employed and small companies who engage other workers will not have to operate the IR35 deductions. However, in such cases, it will remain the responsibility of the contracting PSC to decide whether the contact falls under the IR35 provisions and to calculate any relevant IR35 deduction.
Small companies are defined by the Companies Act 2006 as being a business with two or more of the following features:
- Turnover of £10.2M or less
- A balance sheet total of £5.1M or less
- 50 or fewer employees
Where a business is a subsidiary, if the ultimate parent company does not fulfil the criteria of being a small company then the subsidiary will also fail that test and will need to operate the IR35 deductions. Additionally, where the parent company is small but using aggregate group accounts for the previous financial year and the group exceeds the small threshold, then all group companies will need to apply the IR35 deductions.
Pass the parcel
The engager or “end client” will be obliged to issue the worker with a status determination statement (SDS) which will detail its decision regarding the worker’s status and the reasons for coming to that conclusion. This is the business that is highest up the “food chain”. So, for example, if there is a PSC that is contracted via an agency to the engager, it is still the engager company who will make the status determination.
However, by contrast, it is the fee payer. i.e. the entity closest to the PSC within the “food chain” who is responsible for actually making the deduction. So, in the situation detailed in the above paragraph, it will be the agency which makes the deduction.
The draft legislation contains provisions for a disagreement process where the worker disputes the engager’s opinion that IR35 applies. In such cases, the engager has 45 days in which to inform the worker that they have considered the position and that their status conclusion is correct, and provide their reasons for coming to that conclusion. Alternatively, they must issue a new status determination containing a different conclusion and withdrawing the previous conclusion.
HMRC have a Check Employment Status Tool (CEST) on their website which aims to assist engagers in deciding whether a contract will be subject to the IR35 legislation. They have advised that this will be improved and that the upgraded version will be available later in the year after testing has taken place.
The draft legislation contains provisions that would transfer the PAYE & NIC liability where there is non-compliance. This could, in some cases, result in the engager becoming liable if other entities further down the food chain have defaulted and HMRC cannot collect the liability from them.
HMRC have taken to the tax tribunal IR35 cases involving several high-profile TV and radio personalities with mixed results and also with split opinions from the tribunal panel. The cases involved in-depth analysis of the facts of each case (and particularly the contractual arrangements), and how these were actually applied on a daily basis.
Privately owned businesses who engage PSC company workers should now start to think about considering the terms of the engagement not only at the start of the contract, but also throughout the terms of contract so that they do not fall foul of the IR35 legislation. In particular, they should ensure that the day-to-day reality of how the work is performed does not cause the legislation to apply.
If contracts will be caught by the new legislation, it will be important to ensure that this is communicated to the workers involved and that they are made aware of how this will impact upon the payments they will receive from April.