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Off-payroll working guidance: One tax, two systems

29th Aug 2019
Tax Writer Taxwriter Ltd
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Two Closed Doors in Front in the Room

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:

  1. A public sector body, or medium or large organisation in the private sector; or
  2. 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to find the necessary details from the published accounts on the Companies House website, but those figures could be out of date.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.

Fee-payer responsibilities

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.


Replies (16)

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By memyself-eye
29th Aug 2019 17:45

From Alias Smith and Jones (a 1980's TV show)
"One thing we gotta get Hayes"
"What's that?"
"Outa this business...."

Thanks (3)
29th Aug 2019 19:58

Some of these specialist contractor accountants are about to lose a lot of their clients over the next 6 - 12 months! Probably around a third of their clients.

Thanks (0)
By Rgab1947
30th Aug 2019 10:06

So free choice on how to work continues to be attacked by HMRC.

Have they Chinese or Russian advisors?

Thanks (1)
By kiwilondon99
30th Aug 2019 10:33

a lot of psc's will be trading illegally - ie loss making with no chance of making a profit - and contributing to apprentice levy + incurring additional non deductible fees + trading expenes incurred W&E for the trade - the trade fees not now being recognised as such

also the delays in the determination process will mean Corporate/Engager payrolling for a time whilst determination concluded - and no apparent way of unwinding [ paye ERS EES NI + levy + possibly AE? ] if/when successful

amazing 'tax' grab

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Replying to kiwilondon99:
30th Aug 2019 10:42

"a lot of psc's will be trading illegally - ie loss making with no chance of making a profit"

and this is an issue that doesn't seem to have been debated much anywhere, let alone used to challenge the new proposals.

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30th Aug 2019 11:37

"a lot of psc's will be trading illegally - ie loss making with no chance of making a profit"


All that will happen is that contractors caught by IR35, will then either become an employee or use an umbrella company - unless they have no brain cells, or their accountant didn't advise them properly.

It is akin to the government telling people, as they do in some countries:


1. You buy widgets at £100 from our country,

2. You can buy the stuff elsewhere, but you'll have £200 import tax on it.

In that situation, no-one ever in their right mind would got for option 2, that is what is intended that people only go for option 1, or if they want to be silly buggers they can pay through the nose for it.

It is the same here, anyone caught by IR35 would be stupid to still use their own PSC. Accountants should be telling their clients now that if they have a contract that falls under IR35, that they shouldn't put that contract through their own Ltd Co (PSC).

Thanks (1)
Replying to NewACA:
By RedFive
30th Aug 2019 12:12

I take it by your user name that you haven't been in Practice long.

That may be a textbook answer but I've been in this game a long time and the real world is not as straightforward as that.

Thanks (1)
Replying to RedFive:
By ireallyshouldknowthisbut
30th Aug 2019 14:27

As RedFive aludes, the problem with IR35 in practice is when a client says to you "so do I fall inside or outside again?" all you can too is take a deep breath, and explain what is in their favour, what is in HMRC favour, and conclude that its a "who knows?" answer in most cases where its not obvious one way or the other.

Thanks (1)
Replying to NewACA:
02nd Sep 2019 12:38

I think what you fail to consider is that the client might insist that the individuals still use an Ltd. to engage with them.

The whole IR35 arena is so complex that no one can accurately predict what is going to happen. Individuals will need to assess the situation as it applies to them personally. My situation might be fundamentally different from the next person's.

It's a bit like the use of PC's. We all use them, but I guess our own individual implementations are likely to be unique to us, which is why some will experience an issue, whereas others won't.

Thanks (0)
By Sheepy306
30th Aug 2019 12:10

All very simple for you to say that they should become an employee, but the banks for example aren’t offering employment contracts to every single contractor at present. Some of the employment contracts that ARE on offer are for significantly less remuneration. This is the whole crux of the matter, the banks wanted the flexibility of having minimal commitments, and were happy to offer a premium for doing so, the contractors were happy to accept that premium with the associated risk of job insecurity, lack of pension, employment rights etc.

I have a few contractors at present who intend to continue contracting because either there is no employment offer at present (the banks are awaiting confirmation as to whether this is all definitely going to happen) or because the employment offer is too low so they are still better off remaining as a contractor. The contractors will just suffer a higher rate of tax than they are at present, if they’re lucky they may be able to squeeze a slightly higher fee from the end client to help soften the tax hit.

Thanks (1)
By bendybod
30th Aug 2019 13:11

Companies House does not provide sufficient information to determine the size of the engager - most companies would not file their full accounts at CH and so the turnover would not be available. As the test is 'at least two of...' then they could determine that the company is not small based on one or other of the figures that are available at CH but it may be based on one plus turnover.
Is the average subcontractor really going to understand how to determine whether their end user is small, medium or large?
Presumably the larger contractors will be less inclined than the public sector bodies were to make a blanket decision that everyone should be employed, given the additional costs involved.

Thanks (1)
By cereus77
31st Aug 2019 00:10

Presumably these new rules can only apply to UK based clients however the option of easily working abroad for a few months looks about to disappear.

Given the likely situation with Brexit and the fact that historically I have had more work on the continent than in the UK; I fear I will now be forced to exclusively look for projects outside the UK. Almost certainly this will mean the headache of having to deal with a new foreign tax regime every year or so but at least I will be able to claim the business expenses which are so critical for a one man band to survive.

I have contracted through a UK PSC for nearly twenty years but the constant messing around by HMRC has finally overstepped the mark. In my view, they are just about to kill the goose and they richly deserve the drop in tax revenues I earnestly hope they suffer as a result of this final poorly thought out policy.

It’s ironic that when I started contracting, I was most anxious to avoid being assessed as economically resident in countries like Germany, France and Belgium because of their relatively high taxes; whereas now, on the verge of leaving the EU bound for God knows where, HMRC has finally managed to turn the tables and make anywhere but the UK look more attractive to a UK contractor from a tax perspective. You literally couldn’t make it up!!!

As an aside; I have appreciated the opportunity to share my feelings on this catastrophic policy over the last few months with the generally receptive and sympathetic audience on accounting web - no point whatsoever in writing to my MP or even less worthwhile - HMRC!

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Dave Chaplin
By Dave Chaplin
31st Aug 2019 18:33

Looks like the guidance is wrong if it is saying that the employment taxes (employers NI and App Levy) can be deducted from the earnings that are to be treated as employment income.

SSCBA Schedule 1, 3(2) is very specific about the fact that secondary class 1 NICs (employers NI) cannot be deducted from the earnings.

For inside IR35 contracts, agencies are going to need to be very careful that the rate they have agreed with the contractor is the rate they get are going to get paid as employment income, and not try and deduct employers NI and App Levy from it. It's an easy court case to win - trust me, I've seen this happen very recently.

If they are using umbrella companies then they will need to pass the contractors fees + the employment taxes + the umbrella fee to the umbrella company, and ensure that the umbrella treats all the contractors fees as employment income. Maybe proof of payslips, etc, would do it.

The other nuance with this is that contractors who have contracts spanning April 6th, and are told they are inside IR35, the agency will need to cough up the employers NI. So either they need to chase the client for this, or terminate the contractor. They have no lawful basis upon which to deduct it from the current contract rate.

This is all a consequence of a dogs diner piece of draft legislation.

Thanks (1)
By C.Y.Nical
01st Sep 2019 10:00

I am a director of a private sector organisation which is small according to the definition. The chairman is employed via his own PSC (and we also employ one other person who is treated as self-employed I think quite erroneously, and has been for years, but that is a separate matter).

The article says: 'Where the engager is a small private sector organisation, the worker’s intermediary - their personal service company (PSC) - will make [the employment status determination], as is currently the case.'
But then it says: 'The HMRC guidance tells the engager they must decide the employment status of a worker for every contract agreed with an agency or worker'.

Am I right to read these quotes as contradictory? In the case of our chairman's PSC who must determine whether the contract is caught by IR35 so that employment taxes must be deducted by our company?

And while I'm here, my wife and I are employing a gardener who is coming in for variable hours each week and telling us on each occasion verbally or by text message how many hours to pay at the agreed rate. We know she has other customers, I'm guessing between 6 and 10, and therefore we are treating her as a self-employed person who is responsible for paying employment taxes but I see the new IR35 rules catch private individuals and I'm just wondering what my wife and I ought to do.

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Replying to C.Y.Nical:
02nd Sep 2019 12:31

The "Intermediaries regulations" aka IR35 only apply when there is a Ltd company in the chain. So private individuals who do not use a Ltd company to engage with clients, will not be affected.

It also has to be re-iterated that the term PSC has no basis in law. There are only limited companies, i.e. Ltd. (no stock market flotation) and Public limited companies PLC. (stock market flotation).

Thanks (1)
Replying to IANTO:
By C.Y.Nical
04th Sep 2019 09:12

Thanks. Our chairman does use a limited company. I will pursue the question at our next board meeting but I am still unclear as to whether the chairman's company (the PSC) or our company (the employer) must make the determination.

Your point about the term PSC not having a legal status is agreed but the term seems to be in use universally to describe any limited company (predominantly private) for which the only trading activity is provision of the services of an individual or individuals, and I think it's quite useful in that context.

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