HMRC consults on new private sector off-payroll working rules
In the latest policy development to off-payroll working, HMRC asks us to comment on the implications their proposals will have to medium and large-sized private sector clients.
HMRC has published a consultation that asks for views on proposals it is putting forward to deliver off payroll working to the private sector from April 2020.
Given that time is strictly limited between now and the implementation date of April 2020, the consultation takes the opportunity to clarify HMRC’s response to concerns that have been raised about the Check Employment Status for Tax (CEST) service.
It also provide details about what education and support HMRC intends to provide to all affected parties, in an attempt to ensure readiness for April 2020.
It is intended that the ‘consultation document ‘should give organisations and individuals certainty around:
- How the off-payroll working rules will work from April 2020 and
- The obligations and responsibilities of all parties involved in the labour supply chain’
Defining the scope of this reform
Concerns were raised during the previous consultation that extending reforms to the private sector would have a significant impact (which potentially gained nothing from a compliance perspective) to small private sector organisations and this has been accepted by HMRC.
The definition of a ‘small company’ is currently defined within the Companies Act 2006, and HMRC has highlighted the qualifying conditions which, if met, would exclude a company from these reforms.
‘The qualifying conditions are met by the company in a year in which it satisfies two or more of the following requirements:
- Annual Turnover Not more than £10.2m
- Balance sheet total Not more than £5.1 m
- Number of employees Not more than 50’
However, in recognition that not all organisations will have incorporated and thus need to comply with the requirements of the Companies Act, two options have been presented to be able to identify and exclude unincorporated organisations.
Option one – to unincorporated entities with either:
- 50 or more employees
- Turnover in excess of £10.2m
Option two – to unincorporated entities with both:
- 50 or more employees
- Turnover in excess of £10.2 m
For both incorporated and unincorporated entities when they become small or cease to be small, it is proposed that the change will apply from the start of the tax year following the end of that accounting period.
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This is an area that will require clear guidance from HMRC, provided in a timely manner so as to ensure that organisations will be clear as to whether they are captured by the reforms.
Information published at Budget 2018 predicted that 1.5 million businesses will not be impacted by the reforms – but that isn’t to say they won’t need to be aware of them!
Information needs and requirements and addressing non-compliance
Off-payroll reform in the public sector requires the engaging client to determine the status of the contract. It further requires the fee-payer to deduct income tax and NICs ‘as if’ the contractor were an employee.
In simple working relationships, the engager and the feepayer are one and the same. However, more complex supply chains were identified as a cause of concern as they relate to the right to obtain the determinations to each party within the supply chain.
HMRC seeks to address these problems within the consultation and poses a number of questions that look to identify the impact change would have and to also identify what a ‘typical’ chain looks like for the majority?
The off-payroll reforms have come about due to the belief by HMRC that ‘widespread’ non-compliance exists with Intermediaries (IR35), and the increased PAYE revenue that was collected following off-payroll reform in the public sector is seen as evidence of success.
The vast majority of organisations will comply with the new reforms. However, as with any new reforms, HMRC believes there is a risk of non-compliance amongst the minority and plan to extend existing provisions within ITEPA 2003, Chapter 10, Part 2 to provide for the liability for income tax and NICs to be transferred from one party to another in certain circumstances.
The consultation provides details of the intention to strengthen the existing rules to provide both the fee-payer and the off-payroll worker with reasons for the status determination from the client.
It is also proposed that the client may need to put in place a regulatory process that will allow disagreements to be resolved. It is intended that the client will have a certain amount of freedom to tailor the process within their wider business processes, whilst still maintaining consistency with other organisations.
HMRC is considering legislative options that will enable the fee-payer to make pension contributions to the off-payroll worker’s personal pension tax and NIC free. If utilised, this would see a deduction being made to gross pay before calculating NIC.
HMRC is keen to know what impact this would have on administrative burden, and also how likely it would be for this option to be offered to the off-payroll worker and indeed if offered, would there be a demand for this option?
Preparing for change
Whilst HMRC continues to affirm that the CEST service was ‘rigorously tested’ before reform was delivered to the public sector, continued criticism of the service has seen HMRC recently meet with stakeholders to address concerns, and where possible enhance the service to support customers in making employment status decisions.
As part of this work, it is intended to improve guidance to ensure that the wide range of users, particularly those working through intermediaries, will be able to understand how and why the determination has been made.
Much criticism was also levied at HMRC with earlier off-payroll reforms and it would appear lessons may have been learned as the tax authority has begun to publish new guidance to prompt preparation. This brief guidance prompts organisations to work across departments to:
- review current engagements, to ensure that any undertaking with intermediaries which may include PSCs, agencies or both, are identified,
- put in place comprehensive processes, which will require multi-departmental involvement and co-operation to ensure consistency with status determination,
- decide how status determination will be made, the CEST service can be used - but so can suitably qualified professional advice,
- review all onboarding and recruitment policies to ensure that they are robust enough to identify contracts that are captured by these latest reforms, and finally
- communicate with workers who are engaged through intermediaries to ensure they are aware of the change and how it may impact them.
The consultation remains open until the 28 May. The CIPP policy team has published a survey to gather views and opinions together with experiences of the earlier reforms. This will close on 17 May.