From Tuesday 6 April 2021, organisations in the private sector that engage “off-payroll” workers will become responsible for determining their employment status and paying Income Tax and NICs for those who are deemed to be employees.
This may sound familiar – the change had been due to take place last April but because of COVID-19, it was pushed back a year.
The off-work payroll working rules, commonly known as IR35 have been around since 2000. They were introduced to ensure that individuals who work like employees pay broadly the same employment taxes as employees, regardless of the structure they work through. The rules apply to anyone who provides their services to another person or organisation through an intermediary, such as a personal service company (PSC).
HMRC have found it difficult and time consuming to enforce the rules and has started to shift the burden onto those engaging them. In 2017, the government addressed non-compliance in the public sector and has now set its sights on the private sector.
What is changing?
Currently, the PSC has to decide if the relationship between the individual it supplies to a client would, in reality, be one of employment if the contract was directly between the PSC and the end client. This is done by looking at factors such as who controls the work being carried out, whether the PSC can send a substitute to do the work (with or without the agreement of the client), who supplies the equipment used and the extent to which the client is obliged to offer work and the contractor to accept it.
HMRC believe that 90% of PSCs who should apply IR35 don’t do so – at a cost of £700 million and increasing. Despite that, it doesn’t have a great track record on enforcement and has lost more cases than it has won.
From April, the onus of deciding if an individual falls under IR35 has to be decided by the client engaging them. If it decides they are within IR35 it must pay Income Tax and NICs. This will result in clients paying higher fees or (most likely) negotiating lower fees with the contractor.
Will these new rules apply to all clients?
No. The government has said that the rules won’t apply to small organisations. It defines these as organisations that don’t meet at least two of the following criteria:
- – Annual turnover of more than £10.2 million
- – Balance sheet total of more than £5.1 million
- – More than 50 (F/T equivalent) employees
If your organisation is small but is within a corporate group, the parent company of that group must also be small in order to avoid the new rules.
If the new rules apply:
The end user client will be responsible for determining if the work is caught by IR35 and will be responsible for notifying the person making the payment to the worker. They also have to tell the worker and explain the reasons why they believe IR35 applies.
The end user client must have some form of appeals procedure allowing the worker and/or agency to challenge their decision.
The person (or closest person based in the UK) who pays the PSC will be responsible for withholding any PAYE/NIC on the payments and accounting for these to HMRC under the usual PAYE real time information arrangements.
The responsibilities may vary if the contracting chain is more complex (for example, if there is also an agency involved).
How can we prepare?
This will depend on whether you are the end-user client of the services, an intermediary in the payment chain or the person making the payment to the worker. You’ll need to start preparing because introducing appropriate policies and procedures will be extremely time consuming. The legislation applies to payments made after 6 April 2021, so will apply to any invoices that are paid after date even if the work is done much earlier. You therefore need to be up and running by 6 April 2021.
You will need to consider:
- If you fall within the definition of ‘small’? If so, you won’t need to make any changes provided you remain small in each subsequent tax year.
- If you are caught by the rules, you need to identify any service provider that you need to provide a status determination on. This can be time consuming as many organisations don’t already hold information about those providing services to them through limited companies or partnerships.
- Decide who will be responsible for determining the correct status of your service providers. Do they need additional training? HMRC have, for a number of years, provided an online tool to assist with these determinations – CEST – but it has been heavily criticised by professionals because it doesn’t always come up with the correct answer.
- Decide how you will deal with appeals. Will they be heard by the same person who made the initial determination and how will you ensure that you comply with the strict time limits set out in the legislation?
- Do your existing contracts allow you to withhold tax? Will the tax and NICs be an additional cost you have to meet or can you renegotiate terms so that the cost is factored into the rates charged by the worker?
- Review how the payment processes within your business will work. Many businesses use straightforward purchase ledger payments. However, under the new arrangements the invoice will need to be split between fee and VAT, PAYE and NIC deductions calculated on the fee element with a net payment made to the PSC plus PAYE/NIC to HMRC.
- Do you need to set up a separate PAYE scheme to handle these payments? Organisations will have to process these payments through the PAYE scheme under the real-time information arrangements which means they must be on an RTI submission to HMRC on or before the payment is made. Many organisations operate payments to suppliers on a different timeframe to employee wages and therefore using the same payroll scheme could become very complicated.
- Do you need to advise those suppliers potentially caught by these rules to let them know you’ll be reviewing your internal processes? There’s been a lot of publicity around these changes and workers will be concerned about how they will be affected. In some cases, you may want to ask them to become an employee if they are critical to your business.