Andrew Secker examines two key changes in employment law are coming into force in April 2020 which practitioners should have on their radar when assisting clients to identify and address key issues that may affect workforce costs.
1) Changes to the tax treatment of off-payroll labour
From 6 April 2020, changes to tax legislation regulating off-payroll working (commonly known as IR35) come into effect. These new rules will require large private sector businesses to deduct income tax and National Insurance contributions via payroll from fees for services paid to a personal service company (PSC) where the individual performing the services would, but for the PSC, ordinarily be regarded as an employee of the client company for tax purposes.
The treatment of individuals who are directly engaged by the client company — for example “Joe Bloggs” rather than “Joe Bloggs Limited” — will remain the same.
The correct tax treatment of the fees paid to these workers will depend on whether they are in reality an employee of the client company for tax purposes, or if they’re genuinely self-employed.
At present, the tax liability rests with the PSC. The change will be accompanied by obligations on the client company to determine the correct position for each engagement and notify the other parties involved.
It pays to be prepared for this reform. When similar changes were introduced in the public sector two years ago, many organisations were caught out, or attempted to impose “global” determinations, which were then challenged by their contractors.
Firstly, it may bring about a wholescale change in sectors which rely on off payroll working, which may in turn affect the business (and financial) model. This is more likely in sectors where off payroll is prevalent or demanded by high skilled workers, as can be the case for some operating in the tech, IT, financial services, construction and education sectors.
Secondly, if liabilities are identified or a revised model of working is required, accountancy advice may be needed to quantify the position.
What organisations need to do
Audit off-payroll labour: It is a good idea to start doing this as soon as possible, as the audit process could take some time. It is likely businesses will need to make individual decisions and have different communications with each PSC. The audit will be a factual investigation, looking at what each individual does in practice, how they do it, what contracts they are engaged under, how they are paid etc. This may also be a good time to audit any off-payroll labour that is not provided through PSCs.
Consider the knock-on effects: The audit is likely to have knock-on consequences that may require legal and accountancy advice. As well as determining employment status, a business may need legal advice to amend or draft contractual documentation, to advise on the effects on pension liability, and to consider how this change intersects with rules around immigration, the apprenticeship levy, and the gender pay gap reporting figures and strategy.
2) New reference period rules for calculating holiday pay
The reference period used to calculate holiday pay for workers with variable pay is changing on 6 April 2020. Currently, it is pay that a worker receives during the 12 weeks worked prior to taking a holiday.
Come 6 April 2020, the reference period will be change to 52 weeks, or the number of weeks of employment if a worker has been employed for less than 52 weeks.
Ever since the European Court of Justice (ECJ) held that holiday pay in the minimum four week holiday entitlement under the Working Time Regulations must take into account “normal remuneration” such as contractual or regular patterns of overtime, pay allowances and certain commission payments, the 12 week reference period has been problematic. Fluctuations in pay can lead to higher holiday pay if leave is taken immediately following peaks and lower holiday pay if it is taken following troughs.
What employers need to do
Consider when and how to make the change: For the purposes of holiday pay, many employers begin their year on 1 January. If that is the case, employers need to decide whether to change the way holiday pay is calculated on 6 April, or at the start of their normal holiday year. This is likely to require help analysing the costs. For example, Christmas brings high levels of overtime for some sectors, which could have repercussions on holiday pay if you switch to the new system in January. If a financial year ends after 6 April, the value of accrued but untaken holiday may increase.
Although these legal reforms may seem minor at first sight, they have important legal and financial consequences. Preparation is key to success here: the companies that start work on these changes now will be in a good position going into 2020.