Off-payroll working rules from April 2020

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Rebecca Seeley Harris takes a first look at the draft Finance Bill 2019/20 which contains reforms for the off-payroll legislation, commonly known as IR35. 

The off-payroll working reforms were brought for the public sector from 6 April 2017 and will be extended to the private sector from 6 April 2020.

However, the new rules as proposed in Finance Bill 2019/20 will apply to all engaging organisations in the public sector, but only to medium and large-sized engaging businesses outside of the public sector. They will not apply to the self-employed who engage other workers.

Where the rules do apply, the organisation, agency or third party paying the worker’s company will need to deduct income tax and NICs and pay the employer’s NICs.

Proposed reforms

Where the individual works for a medium or large-sized engager outside of the public sector, through their own personal service company (PSC) and they fall within the rules:

  • the party paying the worker’s PSC (the fee-payer) is treated as an employer for the purposes of income tax and Class 1 NICs.
  • the amount paid to the worker’s intermediary for the worker’s services is deemed to be a payment of employment income or of earnings for Class 1 National Insurance contributions for that worker.
  • the party paying the worker’s intermediary (the ‘fee-payer’) is liable for secondary class 1 NICs and must deduct tax and NICs from the payments they make to the worker’s intermediary in respect of the services of the worker.
  • the person deemed to be the employer for tax purposes is obliged to remit payments to HMRC and to send HMRC information about the payments using RTI.

Small business exemption

As the legislation only applies to medium and large businesses outside of the public sector, those engaging companies that are ‘small’ do not have to apply the rules.

The PSC which provides services to small engagers will continue to assess the status of its own workers or directors and be liable for their tax deductions, where appropriate.

Small businesses are those which meet two out of the following three threshold tests:

  • annual turnover – not more than £10.2m
  • balance sheet total – not more than £5.1m
  • number of employees – not more than 50

Assessment is made to the financial period ending in the previous tax year. For companies, joint ventures and LLPs this will be the period ended before 6 April 2020 for the 2020/21 tax year. For individuals and partnerships running tax year basis, they will assess using their 2019/20 turnover for the 2020/21 tax year.

Individuals must only consider whether they should assess where they are taking on contractors as part of their business. If services are performed in a personal capacity for an individual, this need not be considered.

Subsidiaries

Any business identified as small using the above guidance will still be required to assess if it is the subsidiary of a large or medium-sized parent. If the ultimate parent company is not small under the above individual business definition then all of its subsidiaries will not qualify as small.

Additionally, where the parent company is small, but using the aggregated group accounts for the previous financial year, the group exceeds the small threshold, the parent will be considered not small for these purposes, and all group members subject to this legislation.

The aggregate rules apply where two or more of the following qualifying conditions are met;

  • aggregate turnover – not more than £10.2m net (or £12.2m gross)
  • aggregate balance sheet total - not more than £5.1m net (or £6.1m gross)
  • aggregate number of employees - not more than 50

Disagreement process

The new disagreement process provides for a 45-day period, beginning with the day the challenge is made, where the engager must either:

  1. inform the worker or deemed employer that they believe, after consideration, that the conclusion is correct; or
  2. give the worker and the deemed employer a new status determination statement (SDS), withdrawing the first one.

The engager must also give the reasoning for deciding that the conclusion is correct after it has been challenged.

If a new SDS is given then it is treated as having been given to the deemed employer by the person immediately above the deemed employer in the chain. In the event that the engager fails to:

  • comply with the 45-day rule; or
  • a) or b) above; or
  • fails to provide the reasoning;
  • the engager will take the place of the fee-payer.

This means the liability to deduct the payments for tax is effectively transferred from the fee-payer to the engager if the engager defaults in this disputer process. This is a critical point because the engager could very easily find themselves in default for an admin error.

Guidance

HMRC will publish detailed guidance for organisations and both general and targeted education packages, including webinars, workshops and one-to-one sessions with businesses in particular sectors.

Enhancements will be made to the check employment status for tax (CEST) tool, which will be tested by legal and operational experts and stakeholders.

HMRC says the improved CEST will be available later in 2019. This is earlier than HMRC originally suggested, so let’s hope it is available before April 2020.

Key concerns

The government has confirmed that the reform is not retrospective. HMRC will focus on ensuring that businesses comply with the reform for new engagements, rather than reviewing past cases.

HMRC has also confirmed that it will not carry out targeted campaigns into previous years when individuals start paying employment taxes under IR35 for the first time. An organisation’s decisions about whether workers are within the rules will not automatically trigger an enquiry into earlier years.

The 5% allowance

This is currently available to those who apply the off-payroll working rules to reflect the costs of administration. It will be removed for engagements with medium and large organisations.  It will, however, continue to be available for engagements with small organisations.

Pension contributions

The pension contributions that were mooted in the consultation document have not been included.

Start date

If anti-IR35 lobby groups do not succeed, then these reforms will be in force from April 2020.  Businesses that qualify will need to start taking action now by carrying out employment status audits and putting in admin systems.

It is also worth considering outsourcing the whole or part of the process to alleviate the admin burden and taking out insurance and indemnifications. Given the right approach and some forethought in the planning, it is perfectly possible to maintain a flexible workforce that is outside of IR35.

About Rebecca Seeley Harris

Rebecca Seeley Harris

Rebecca is a specialist in ‘employment status’ and the law involving independent contractors and the self-employed for the purposes of tax and employment law. Rebecca has run her own consultancy for the past 20 years but, has recently joined PKF Francis Clark as Director of Employment Status.  She will be heading up a team covering all employment status issues such as off-payroll in the private and public sector, otherwise known as IR35, s.44, CIS and any issues affecting the self-employed and personal service companies.

Rebecca was also seconded to the Office of Tax Simplification (an independent body of HM Treasury) as a Senior Policy Adviser to advise the government on employment and tax status.  She was part of a small team of experts who drafted the Employment Status Review 2015, she then continued to advise on the review of Small Company Taxation leading on the taxation of nano companies and the self-employed. As a result of that review, Rebecca developed the concept of SEPA, providing a vehicle to the self-employed to be able to protect the family home. Rebecca was also a representative on the Cross Government Working Group on Employment Status and has most recently published the review into the taxation of the Gig Economy.

To call Rebecca: 01392 407936 or email [email protected]

 

Replies

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By jonspe
15th Jul 2019 10:21

I am now retired but I really do sympathise with those brave souls who set up their own practices today. It must be nigh on impossible today to be a sole practitioner providing a comprehensive advisory services to small/medium sized clients.
There is no doubt that the real masters in this country - the senior civil service - follow an anti-SME agenda but instead of using the executioner's axe they prefer the more drawn out death by a thousand cuts.
This country is becoming ridiculously over-regulated, not least in the field of taxation. It really is about time the accountancy bodies used their influence - assuming they have any - to stop this ever increasing bureaucracy that must impede enterprise in this country.
We really are at the crossroads. We either go completely down the European style rigid codification , so eagerly implemented by our useless civil servants, or we get back to what made Anglo-Saxon (in the widest geographical sense) entreprise pre-eminent. There is no middle mashed up compromise available. It's either or.
So it would be refreshing indeed to hear the accountancy bodies tell the civil service, not least the HMRC, in strident terms that they, the civil service, do not have a clue on how to promote enterprise and the very best thing they could do would be to get lost.

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15th Jul 2019 10:30

What a disaster - HMRC has paid no heed whatsoever to the very justifiable concerns raised by contractors; the fact that it will not be possible to claim expenses, the lack of any benefits in return for this temporary employee status and that they already dealt with the perceived tax avoidance by the introduction of the Dividend Tax. And what a great time to smash the UK contracting industry just as Brexit looms. I will regrettably be moving the focus for my contracting to continental Europe and paying tax in whichever country I am working from the inception of these rules.

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15th Jul 2019 11:10

I have a client who works as an IT contractor for HMRC. When this whole IR35 was introduced to Government, HMRC was faced with a threatened massive exodus of IT contractors. Solution? HMRC agreed not to apply IR35 to their own contractors.

Note I have this on hearsay.

If true does that negate HMRC's submissions to any tribunal?

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15th Jul 2019 11:16

My main concern is the loss of very highly skilled people to other more tax favourable locations.

Generally people with these skills are contractors not to save tax but to be in control of his or her destiny.

The figures mentioned in extra tax revenue will only arise if they can be collected. Personally I would scrap this piece of legislation. It appears that we will be leaving the EU and when his happens we cant afford to loose any people paying taxes. But as a previous poster has said Civil Servants really have not a clue.

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15th Jul 2019 14:14

Unbelievably stupid & cynical from HMRC. As I suspected, they are pushing ahead with this, the 'consultation' was merely a facade.

The government claims there is a high degree of non compliance. This is clearly not supported by any evidence. In the last twelve case decisions, since April 2010 they have only fully won 1 case out of 12 - just an 8% win rate.

HMRC’s Litigation and Settlement Strategy (LSS) states (Page 7) "where HMRC believes that it is unlikely to succeed in litigation it will, in the majority of cases, concede the issue". If HMRC are litigating in a reasonable manner they should be winning at least half of cases.

This is also very damaging to the flexibility of the workforce for UK businesses, one of the key reasons why the UK has been a competitive economy relative to more inflexible economies in Europe.

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By IANTO
16th Jul 2019 10:31

HMG consultations are almost always a facade and the consultation on the IR35 rules to be applied in April 2020 is no exception.

It has been observed even by MP's that HMRC's policy is to tax first and deal with the fallout later. In this case, the fallout could be increased claims in the ET for employee benefits and it's only a matter of time before this happens and only when a high profile agency or client is hit with a huge retrospective bill for holiday pay and pensions rights will we see any real pressure from the clients.

When it comes to pensions, HMRC are singling out individuals caught under the new rules for special treatment. Now I understand that under EU rules, and this needs to be confirmed, it is illegal to target an identifiable section of the community with a specific tax law.

The issue with pensions is that every employed person and business is allowed to deduct pension contributions at source prior to any tax and NIC's being applied. This process will not be available to anyone caught by the new rules.

They may make pension contributions directly themselves, but this will come out of nett income. It's an issue that doesn't seem as yet to have been debated very much. But those of you on here who are eminently qualified in this area might be able to advise further.

However, the mantra must now be "no employee taxes without employee benefits".

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16th Jul 2019 09:42

I'm slightly confused by terminology - when it comes to determining 'small', is it the engager's or the PSC's size that is the deciding factor?

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