From 6 April 2020 the government is extending the IR35 regime to the private sector, three years after it was imposed on public bodies.
The effect will be to shift responsibility for determining employment status from a contractor/worker to the engager.
Currently, contractors working through their own personal service company can self-determine their IR35 status and whether they need to pay income tax and National Insurance contributions (NICs) as deemed employees of their clients, but from April 2020 they will no longer be able to do this as the responsibility will fall on the engager or agency taking on the contractor.
The end user will be responsible for determining whether the contractor would have been regarded as an employee if they were engaged directly.
Where the contractor is engaged via an agency, the obligation to deduct PAYE and NICs would fall on the agency, or the organisation making the payment to the contractor’s company.
Where the contractor is determined to be within IR35, the fee payer must deduct PAYE and NICs from the contractor’s fee.
However, only medium or large-sized businesses in the private sector that engage such contractors will be affected. Small companies will be exempt, and in those cases the contractor will continue to self-determine.
Small companies can avoid responsibility for determining a contractor’s status provided they meet at least two of the following requirements (per Companies Act 2006):
Where the engager’s business is not incorporated, a simplified test of the annual turnover of £10.2m applies.
The engager of the contractor’s services has to make a status determination and provide a Status Determination Statement (SDS) to both the contractor and the fee payer (e.g. an agency).
The engager must take prudent and reasonable care when making their determinations. If such care is found not to have been taken, the end user will take on the responsibilities of the fee payer to operate PAYE and NICs where applicable.
The requirement to apply reasonable care in making a determination means that blanket determinations cannot be made covering a whole group of contractors. Such determinations will not be valid and the engager will be responsible for the PAYE and NICs.
Where a contractor disagrees with the engager’s status determination, the engager will have to complete a disagreement process and inform the contractor or fee payer of the outcome within 45 days of receiving the contractor’s notice. Failure to do this will result in the engager being regarded as the fee payer and thus responsible for any PAYE and NICs due.
HMRC provides an online employment status tool, Check Employment Status for Tax (CEST), to help determine whether a worker should be classed as employed or self-employed.
Many regard this tool as unsatisfactory and biased towards employment, and not a replacement for the many decades of case law on employment status.
HMRC has said that where the tool is properly used, it will accept the result. But doubts remain as to whether this will in fact be the case.
HMRC has made clear that the off-payroll working rules will only apply to payments made for services provided on or after 6 April 2020.
Originally the rules would have applied to any payments made on or after 6 April 2020, regardless of when the services were carried out. It means organisations will only need to determine whether the rules apply for contracts they plan to continue beyond 6 April 2020.
So contractors will need to ensure that the fee invoices raised by their personal service companies explicitly differentiate between work carried out before 6 April 2020 and on/after 6 April 2020. In addition, clients and agencies in the labour chain will need to ensure they are able to separate fee invoices relating to work undertaken before and on/after 6 April to ensure that the right payments made on/after 6 April 2020 are processed under the new rules.
HMRC says that where a payment is made for services provided both before and after 6 April 2020, a just and reasonable apportionment should be made.
The tax department has finally published some long-awaited guidance. Although HMRC guidance is not law, it does provide practical information. It's a great pity that such guidance has been issued with less than two months to go before the new regime starts, and it is to be hoped that there will be a relaxation on penalties and interest for a transitional period.
The government has published its review of the new rules to assess their impact. It concludes that there will be a "soft landing" for the new regime, but there will be no delay in the off-payroll rules being introduced.
Businesses will not have to pay a penalty if they incorrectly assess the status of a contractor in the first year of the new rules, under a "light touch" approach.
HMRC has also said it will not use information obtained under the new regime to begin compliance checks into personal service companies for years prior to 6 April 2020.
However, the House of Lords Finance Bill Sub-Committee has also launched an inquiry into the new rules, calling for evidence from those affected. The deadline for the submission of written evidence was 25 February 2020. Their report is awaited with interest.
Some engagers are trying to put the onus on agencies and umbrella companies to undertake the engagement of contractors and consequently to deal with all the payroll issues, but this does not remove the risk from the engager if the agency etc. fails to deduct any PAYE and NICs on payments to the contractor.
Businesses therefore need to review their workforce and put any processes in place that are necessary to comply with the new rules and reduce the risks of non compliance. Note what HMRC regards as reasonable care.
Please contact our personal tax or payroll team if you would like help with this.