Off-payroll working guidance: One tax, two systems
HMRC has released new guidance for engagers, fee-payers and intermediaries to help them operate the revised rules for off-payroll working from 6 April 2020.
From 6 April 2020 there will be two parallel systems for applying the IR35 rules, which must be used depending on whether the engager (the end client) of the contract worker is:
- A public sector body, or medium or large organisation in the private sector; or
- A small private sector organisation.
For contracts in category one, the engager will need to make the employment status determination to assess whether tax and NI deductions should be made as if the worker was an employee.
Where the engager is a small private sector organisation, the worker’s intermediary --their personal service company (PSC) -- will make that decision, as is currently the case.
The new HMRC guidance explains that the criteria for a small private sector organisation are based on company law, but it also applies for unincorporated organisations including charities and individuals.
An engager which meets two of these conditions for the financial period ending in the previous tax year is regarded as small:
- less than £10.2m annual turnover
- less than £5.1m balance sheet total
- no more than 50 employees
It is not clear from the HMRC guidance how the contractor, or their PSC, will know whether their customer (the engager) is “small”, other than when they fail to receive an employment status determination.
Where the customer is a company, joint venture or LLP the contractor should be able to find the necessary details from the published accounts on the Companies House website, but those figures could be out of date.
Employment status determination
The HMRC guidance tells the engager they must:
- decide the employment status of a worker for every contract agreed with an agency or worker
- pass that determination and the reasons for the decision to the worker and to the agency it contracts with
- keep detailed records of all employment status determinations, including the reasons for the determination and the fees paid
- have processes in place to deal with any disputes that arise from the determination
It is also clear that the engager must make the employment status determination on or before the date the contract is entered into. That is going to be a big job for many large engagers as they need to have determinations in place by 6 April 2020 for all contracts which are running at that time.
The engager must take reasonable care when making the determination, but the HMRC guidance does not advise the engager what evidence it needs to take into account when making that determination.
In practice, HMRC will expect the engager to use the check employment status for tax (CEST) tool to reach a decision on employment status. But the CEST has been criticised by the professional accounting and tax bodies and contractor groups for ignoring key elements of the employment status tests as established by case law. HMRC says it will be updating the CEST in time for implementation of the revised off-payroll rules.
Challenge the determination
The worker can object to the employment status determination if they can give reasons for the disagreement.
A key element of the employment status test is where the worker is “in business on his own account”, and this requires a view of the worker’s entire business including other engagements. The contractor may not want to share this commercially sensitive information.
The engager must respond to the contractor’s objection to the determination within 45 days, giving either the same answer or whether the determination has changed. Meanwhile, the engager must continue to apply the IR35 rules in line with its determination.
The worker can choose to leave the contract and seek work elsewhere, or request a higher gross fee to compensate for the tax and NIC which will be deducted from that fee.
HMRC advises that the fee-payer will normally be the organisation which pays the worker’s intermediary (the PSC). The fee-payer must be independent of the worker, so it is not controlled by, or have a material interest in it held by, the worker or an associate of the worker. The fee-payer must also be resident in the UK or have a place of business in the UK.
When the fee-payer receives the employment status determination it must calculate the deemed direct payment to the PSC. If it doesn’t receive the employment status determination it must pass on payment without deducting tax or NI.
The HMRC guidance says the fee-payer must:
- calculate the deemed direct payment to account for employment taxes and NICs associated with the contract
- deduct those taxes and employee NIC from the payment to a worker’s intermediary
- pay employer NIC to HMRC
- report the deductions on the FPS indicating that the person is an off-payroll worker
- apply the apprenticeship levy and make any payments necessary.
The HMRC guidance makes it very clear that the fee-payer must pay the employer’s NIC and not deduct those charges from the contractor’s fee.