What, why and when?
Medium and large businesses now have 7 months to prepare for changes to tax rules on off-payroll working. There are exemptions for ‘small’ companies. The legislation, due to come into effect in April 2020, mirrors that that has been in place for the public sector since April 2017. The legislation was introduced as a tax avoidance measure to prevent employees resigning from their role and returning as a contractor.
The new legislation shifts the burden of determining whether a worker engaged directly or indirectly through a PSC (Personal Service Company) is truly a contractor or an employee. HMRC have never had enough resource to police all of the estimated 500,000 personal service companies however, they are now determined to crack down on what is described as ‘disguised employment’.
There are both advantages and disadvantages of being a worker engaged as a contractor or via a PSC however, one of the the main advantages is the tax position; when a worker works outside of IR35 they often pay a lower tax rate.
To be ready for this new legislation it is critical businesses should start reviewing their practices and workforce.
How do you know if someone falls inside IR35?
There is no one test on the subject. Nevertheless, there are a few questions to start asking to determine whether someone falls inside IR35:
- how much autonomy the contractor has in terms of how they deliver a project. A high degree of control indicates an employment relationship;
- is there a right to substitution in the contract? Someone who is genuinely self-employed will usually have a provision in their contract allowing them to provide a substitute;
- ‘mutuality of obligation’ if a contractor is hired to complete a defined project or deliverable with an end date and they then move on or are re-engaged under a new project, that indicates a lack of mutual obligation. However, an open-ended contract where an individual is asked to perform different tasks may more closely resemble employment;
- the degree of integration the contractor has with the business; are they part of the business?
What must businesses do to comply?
- must determine the status of the worker
- must provide a status determination statement (“SDS”) to the party that it contracts with
- remain liable for operating PAYE where deemed employment status applies until the business issues the SDS to the worker.
- must comply with a “status disagreement process” if either the worker or deemed employer disagrees with the SDS.
- must deduct tax and NIC from payments it makes to the contractor/ PSC and make payment to HMRC, together with any employer NICs and the apprenticeship levy (where the contractor is deemed to fall inside IR35).
For further guidance please see: https://www.gov.uk/guidance/fee-payer-responsibilities-under-the-off-payroll-working-rules
In some instances, it is not quite as simple as a two-party agreement and there can be a labour chain involved including the use of agencies. In these cases, each additional party in the labour supply chain is also responsible for:
- cascading down to the next party the client’s SDS and
- where it is the fee payer, it must deduct and pay the relevant employment taxes to HMRC.
Sanctions & Penalties
Getting it wrong could be expensive and time-consuming for employers.
If HMRC were to successfully challenge a determination on the status of a worker, or fail to follow the process above, it would be the business, and not the contractor / PSC, that HMRC would pursue for late payment of the relevant PAYE, NIC, interest and, potentially, penalties.
The proposed amendments to the PAYE regulations have not yet been published but it is anticipated that that they will give HMRC the power to recover unpaid employment taxes from others in the supply chain, such as the first agency at the top of the chain or the business, where the person responsible for making such payments fails to do so.
Five Steps to make sure your business is ready
- Budget for the change now.
HR should work with other departments including finance, procurement and legal. It is likely that existing agreements with contractor and agencies will have notice periods, do these contracts include tax indemnities as a fall back, do you need to introduce any further due diligence when engaging with a contractor/ PSC/ Agency?
2. Think about pay rates.
Whilst blanket assessing everyone as inside IR35 would effectively eliminate the tax risk, businesses that choose to do this may have to increase their pay rates to compensate for the reduction in take-home pay for contractors and may find they have issues attracting or retaining them.
3. Undertake a wider assessment of business needs.
Think about what skills you as a business need and where you require flexibility. Some businesses are finding they’ve had contractors for 20 years doing the same job. It is now time to take stock and think: Should we really employ these people? The challenge is trying to mitigate the risks, but also retain flexibility to scale up and down when needed. Think about what contingencies you may need to have in place should workers were to object any determination that they fall inside of IR35 and leave as a result.
4. Train relevant employees in making IR35 status determinations.
Collate information internally (or externally) from which to make an IR35 status determination. Be thorough in your approach; businesses need to be able to show they have taken reasonable care in their assessments. HMRC will look at the size of the business, and if it has got significant human and financial resources, they’ll expect them to have really put some time, effort and cost into getting this right.
5. Put in place a status disagreement process meeting HMRC’s requirements.
Do your contractual terms include a dispute resolution process already and is it clearly communicated to agencies and contractors?
HMRC is promising to publish further guidance this year. It has also committed to having the enhanced HMRC Check Employment Status for Tax (CEST) service in place before next April which can currently be found here: https://www.gov.uk/guidance/check-employment-status-for-tax
Should you need any further support or advice with the above our team would be happy to help:
01926 355 560