The new off-payroll working consultation has arrived and according to RSM’s David Williams-Richardson, it puts an increased burden on private sector employers and recruiters.
The government yesterday published the much-awaited policy and consultation document on proposed reforms to the off-payroll working rules (known as IR35) for medium and large businesses in the private sector due to apply from 6 April 2020.
The document provides welcome clarity on the proposed operation of the rules. It is disappointing, however, that no firm details about aligning the employment status tax and rights frameworks have been issued following the recent publication of the Good Work Plan.
The government has, however, committed to ensuring that an enhanced Check Employment Status for Tax (CEST) service will be available before the reform is implemented and has also announced that an education and support package will be put in place.
As expected, it has been confirmed that the reform will be primarily based on the off-payroll working legislation introduced in the public sector from 6 April 2017 but with important proposed changes to that current legislation, predominantly around clarifying the obligations of the business using the services of the worker and those involved in the supply chain. Importantly any changes around these points will apply equally to both private sector businesses and those in the public sector from April 2020.
The new legislation impacts medium and large end-user businesses in the private sector using the services of off-payroll workers operating via intermediaries such as Personal Service Companies (PSC). It also impacts other parties in the supply chain such as recruitment agencies who onwardly provide workers who operate through intermediaries such as personal service companies.
Medium and large businesses in the private sector now have just 13 months prior to the implementation of these rules and the work required to be prepared for this change should not be underestimated. Sufficient preparation will be crucial.
Why is the government introducing these changes?
The IR35 rules were originally introduced in 2000 with the intention of ensuring that individuals who are working like employees but who operate via an intermediary, such as a personal service company (PSC), pay broadly the same tax and National Insurance Contributions (NIC) as an employee would.
The IR35 rules have, however, been largely ineffective as the PSC has had to ‘self-assess’ whether the rules apply. HMRC estimate that there is widespread non-compliance which they have been unable to effectively tackle which will result in lost tax and NIC revenues of £1.3bn by 2023/24 in the absence of change.
What is the proposed change?
The reform will place the burden for determining whether IR35 applies onto the private sector end user of the worker’s services, where they are a medium and large businesses, from 6 April 2020. Where it is determined by the end user that IR35 applies, the fee payer (which may be the end user themselves or another third party) will become responsible for accounting for and paying the related tax and NIC, including the additional cost of employer’s NIC, to HMRC.
Where the end user of the worker’s services is a small business, it is confirmed that the responsibility for assessing the arrangements and applying IR35, will remain with the PSC. This will be the case even where the worker is provided via a third party such as an agency.
What is a small business?
The Government has confirmed that it intends to use the existing statutory definition from the Companies Act 2006 to define a small business. This is a business that has two or more of the following features:
- an annual turnover of £10.2m or less;
- a balance sheet total of £5.1m or less;
- 50 employees or less.
The consultation document acknowledges that the Companies Act definition does not apply to non-corporate end-user clients (such a partnership) and proposes a separate test for such entities that will either apply to businesses that have both 50 or more employees and turnover exceeding £10.2, or which meet one of these tests.
It is also confirmed that where these tests are met part way through an accounting period the off-payroll working rules will apply from the start of the tax year following the end of that accounting period.
Clarity on responsibilities for each party in the supply chain
The Government has acknowledged that there is a need to provide legislative clarity around requirements to pass on the status determination (and the reasons for reaching that determination where requested) down the labour supply chain. Importantly it proposes to change the legislation so that the end user of the services must provide both the off-payroll worker and the party they contract with (such as an agency) with details of the status determination.
It is also proposed that all parties in the supply chain will be required to pass on details of the determination down the chain although it is acknowledged that there may be the need for a ‘short circuit’ solution in the case of lengthy supply chains!
It is acknowledged that the current rules have no clarity around the processes to be followed in the case of status disagreements and provides suggestions as to how this may work from 6 April 2020 both for the private sector and the public sector. Interestingly the current proposal is for clients to develop and implement their own processes to resolve disagreements but based on a set of requirements to be set out in the legislation.
Where HMRC does not receive the tax that it believes is due it is also proposed that the liability will fall upon the entity in the labour supply chain that has not met its obligations. Importantly it is also confirmed that if HMRC is unable to collect the outstanding liability from that party, that it will transfer back to the first party or agency in the chain, which could be the end user itself. Clearly, this will act as a real incentive for businesses to undertake appropriate due diligence on their labour supply chains going forward.
All these obligations will create a significant ongoing administrative burden as well as an increased exposure to risk of non-compliance for both the end user of the services and those in the supply chain. Businesses will need to ensure that they have robust procedures in place to meet their ongoing obligations and be ready for implementation.
About David Williams-Richardson
David Williams-Richardson is a partner in RSM’s employer solutions team in Gatwick where he specialises in all aspects of employment tax compliance and advice. He has particular expertise in issues such as IR35/employment status, termination payments and dealing with HMRC disclosures and reviews including advice on employment tax aspects of senior accounting officer (SAO), Know your Customer (KYC) and traditional PAYE audits.
David advises clients across a range of industries with particular focus on the recruitment and aviation and travel sectors.