Off-payroll working reforms: Would we benefit from a delay?
Samantha Mann, senior policy and research officer at the CIPP, considers whether the upcoming off-payroll working reforms will benefit from a delay in delivery.
Until recent years, few people had heard the term IR35 and even fewer had knowledge of the intermediaries legislation to which it referred. Only the most fearless ventured into the subject – whether they needed to or not.
However, with the latest reforms to the legislation due to be rolled out in the private and third sector from 6 April 2020, we are hearing a growing call for a delay in their delivery. Are you getting a sense of déjà vu?
Intermediaries legislation (IR35)
Intermediaries legislation obliges the intermediary to assess whether a contract is one of deemed employment between the engager and the individual who is providing their personal services. It asks whether the individual would be an employee if they weren’t working through an intermediary such as a Personal Service Company (PSC).
If a contract is considered to be captured by the IR35 rules, then it will attract employment taxes as if it were one of employment – specifically PAYE income tax and national insurance contributions (NICs).
The calculation for PAYE and NIC on the deemed payment is based on an eight-step process as laid out in ITEPA 2003 s54. The deemed payment needs to be submitted on an FPS by 5 April. HMRC provide an online calculator to help support the calculation process.
The aim of IR35 is to ensure that approximately the same tax and NIC yield will be paid as if the individual had been directly employed by the client – and not via the PSC.
Off-Payroll working in the public sector
Since April 2017, off-payroll working reforms have been introduced in a bid to reduce non-compliance which HMRC believed to be widespread.
These reforms saw the responsibility for determining the status of the contract move from the PSC to the engaging client. If found to be one that was captured within the rules of IR35, the responsibility for the processing of PAYE and NICs falls to the fee payer – which may be the engaging client or an agency within a supply chain.
HMRC carried out a small amount of research in the months following the launch and, based on the increased tax yield, viewed the rollout to be a success.
When asked ‘how was it for you?, the CIPP’s public sector members reported months of disruption caused due to late publication of guidance resulting in a widespread lack of awareness. Some top tips taken from the feedback include:
- Plan well ahead
- Develop cross-team working with all parties, including payroll, HR, finance and procurement
- Communicate the change to contractors well in advance, including updated onboarding processes for those found to be within IR35
- Budget for additional direct costs eg employer NIC and indirect costs ie staff resource to manage the additional burden
- Allow for additional staff time – feedback suggested that in the early stage as much as 20% of the working week could be taken over to dealing with queries of an off-payroll nature.
Off-payroll working in the private sector
It was announced in Budget 2018 that the off-payroll working reforms will extend to medium and large companies from April 2020. Much was made about ‘extra time’ being allowed to ensure a smooth landing for all parties this time.
However, here we are with four months to go and full guidance has yet to be published, legislation yet to be passed and the improved CEST tool which promises improved accuracy and better user experience has yet to be launched. It is hardly surprising that increasing calls are being made for a delay.
Key changes that are being brought in which will also impact on public sector bodies include:
- transfer of liability in supply chains;
- improved communication flow of status determination decision - both to the contractor and to the fee payer; and
- client-led status disagreement process that will require the engaging client to respond to representations from the contractor and/or fee payer.
Impact on payroll processes
Payroll software from April 2020 will be required to include an off-payroll worker indicator so as to ensure that HMRC processes recognise the individual being reported is not an employee. This requirement was missing when off-payroll working was first introduced to the public sector, albeit many software providers built this flag in to benefit their client processes.
Increasingly, questions are being asked that relate to the consequence of an off-payroll determination as it relates to an employment rights perspective, for example, automatic enrolment, statutory payments or holiday pay.
The intermediary remains responsible for providing employment rights to the individual and, for the time being at least, the focus with off-payroll working remains on ensuring that the contract results in approximately the same amount being raised in taxes as if it were one of employment.
Information and educational materials
As far back as 2015, when research was first carried out by HMRC to gather qualitative evidence to support (or otherwise) the proposal, it was clear that all parties were in need of clearer information and a better range of education materials. This could include information packs, seminars and online training. This has been promised, however, the general election has called a halt to the online webinars.
The same research revealed a need for a specialist helpline which has since come to fruition and operates Monday to Friday 0300 123 2326.
Employment allowance and deemed employments
On a final note, secondary (employer’s) Class 1 NICs that arise from deemed employment contracts are not included within the £100,000 limit, below which an employer may be able to claim the employment allowance from April 2020.
Employers that claim the employment allowance will need to be aware that their claim may be rejected by HMRC because their systems will not know which secondary NICs are due on deemed employments currently.
If an application is rejected, a GNS message will be sent within five days of the employer claiming the employment allowance. If this occurs, the employer will need to make contact with HMRC in order to make their claim for the Employment Allowance.
We are assured that draft guidance is ready to go, but it is yet to be published. Online webinars have come to a halt as a result of election purdah. We have no date for the resumption of the Finance Bill and increasingly, research is reporting that low numbers are ready for further off-payroll reforms. A delay would, indeed, seem sensible.