Rebecca Seeley Harris drills into the proposals for off-payroll working (IR35) rules to apply in both the private and public sector from 6 April 2020 and provides tips on how to prepare.
The latest consultation on the off-payroll working rules offers wide-ranging insight into what is to come and also provides some clarification on the existing public sector rules. The consultation refers to the customer or engager of the worker as the “client” throughout, and this is the term that is used in this article.
The April 2020 reform will use the off-payroll working rules in the public sector as a starting point. The client will be required to make a determination of a worker’s employment status and communicate that determination. If the determination of employment status is “deemed employee”, the fee-payer will need to make deductions for income tax and NICs, and pay any employer NICs.
The small company exception
The reforms will only apply where the client is a medium or large business, or a public body, which means there is an exception for clients who are small businesses. The government has chosen to use the definition of 'small company' in the Companies Act 2006, mainly because businesses and accountancy professionals should already be familiar with this definition and to what extent it applies to them.
The Companies Act definition doesn’t include non-corporate entities so, the government is proposing two options:
a) to apply the reform to unincorporated entities with 50 or more employees and to entities with a turnover exceeding £10.2m.
b) to apply the reform only to unincorporated entities that have both 50 or more employees and a turnover in excess of £10.2m.
When an organisation becomes or ceases to be “small” in an accounting period, the change relating to the off-payroll rules will apply from the start of the tax year following the end of that accounting period. This is the case regardless of whether the organisation is incorporated or unincorporated.
From 6 April 2020, any client organisation which falls within the rules will be liable for any income tax and Class 1 employee NICs due on deemed payments of employment income until it has fulfilled its obligations. These organisations will also be liable for employer NICs due on those same payments.
It is not clear how an off-payroll worker would know whether the engager should be applying the rules or not or whether, as in the case of the small company exception, the off-payroll worker themselves should be making the determination.
The proposed reforms are designed to ensure the determination of employment status, and the reason for that determination, are cascaded to all parties within the labour supply chain. The consultation document doesn’t comment on whether the client is required to make the determination themselves, or whether the client could outsource the employment status decision and the whole process could be handled by an external team.
For off-payroll workers, the client will be required to provide the determination of employment status and, if requested, the reasoning for the determination, to the worker directly. The legislation will be changed to provide clarity that the client must provide both the contracting party and the off-payroll worker with the determination of status for each engagement.
Under the current public sector rules, the fee-payer is not entitled to see the determination of status, but the government intends to legislate to require all recipients of a determination to pass that information on to the next party in the contractual chain at, or before, they make the first payment.
A ‘short circuit’ solution will be available where labour supply chains are long and complex. In this version, the fee-payer would receive the determination of status directly from the client. This would require the client to know who the fee-payer is. As a result of the complexity, the government is seeking views on how the client may be in a position to identify the fee-payer and provide the determination to the party they contract with, the off-payroll worker and the fee-payer directly.
What is clear is that all parties in the labour supply chain will need robust systems to ensure that they can track that the determination of status has been cascaded and received by the next party in the chain. Otherwise, they risk having the liability for tax transferred to them.
In the event that HMRC does not receive the tax due, the government is proposing that the liability should initially rest with the party that has failed to fulfil its obligations. If, however, HMRC was unable to collect the outstanding liability from the defaulting party if, for example, it ceased to exist, the liability should transfer back to the first party or agency in the chain. If HMRC could not collect from them, it would then default back to the client.
The government believes that as the agency is the first supplier of labour to the client, it should be responsible for the behaviour of the chain. The government also believes that the agency has a number of options open to it such as getting an indemnity against non-compliant fee-payers, taking on the fee-payer responsibility themselves or choosing to only work with reputable firms.
Currently, there is no mechanism for challenging a status determination other than the off-payroll worker using the end-of-year processes for overpayment of tax. In addition to the off-payroll worker being entitled to receive the status determination and the reasoning for the determination from the client, the government understands that the off-payroll worker or the fee-payer may disagree with a client’s determination. This might be either because it is believed that the full circumstances have not been considered, or that the client has not taken reasonable care in making the determination.
There are two steps proposed for resolving any status disagreements:
- To have the right to seek the status determination directly from the client.
- To allow for the status determination to be challenged.
The government plans to introduce a client-led status disagreement process where the client will develop and implement a process to resolve disagreements based on a set of requirements laid out in legislation. This client-led process should also mean fewer off-payroll workers using the end of year processes to reclaim tax, and it is hoped that it will provide a resolution in real time.
No employment rights or benefits
As applies in the public sector, statutory payments and other employment rights will not be affected by the proposed reforms to off-payroll working rules from April 2020. This means that the deemed employment relationship for tax purposes will not result in employment rights or statutory payments obligations for the deemed employer or for the fee-payer.
Organisations affected by the reforms to off-payroll working should take the following actions now to prepare:
- Identify and review their current engagements with intermediaries, including PSCs and agencies that supply labour to them.
- Review current arrangements for the use of contingent labour, particularly within the organisation functions that are more likely to engage off-payroll workers.
- Put in place comprehensive, joined-up processes (assess roles from a procurement, HR, tax and line management perspective) to get consistent decisions about the employment status of the people they engage.
- Review internal systems, such as payroll software, process maps, HR and on-boarding policies to see if they need to make any changes.
About Rebecca Seeley Harris
Rebecca is a specialist in ‘employment status’ and the law involving independent contractors and the self-employed for the purposes of tax and employment law. Rebecca has run her own consultancy for the past 20 years but, has recently joined PKF Francis Clark as Director of Employment Status. She will be heading up a team covering all employment status issues such as off-payroll in the private and public sector, otherwise known as IR35, s.44, CIS and any issues affecting the self-employed and personal service companies.
Rebecca was also seconded to the Office of Tax Simplification (an independent body of HM Treasury) as a Senior Policy Adviser to advise the government on employment and tax status. She was part of a small team of experts who drafted the Employment Status Review 2015, she then continued to advise on the review of Small Company Taxation leading on the taxation of nano companies and the self-employed. As a result of that review, Rebecca developed the concept of SEPA, providing a vehicle to the self-employed to be able to protect the family home. Rebecca was also a representative on the Cross Government Working Group on Employment Status and has most recently published the review into the taxation of the Gig Economy.
To call Rebecca: 01392 407936 or email [email protected]