Off-payroll working rules from April 2020
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.
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.
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
The new disagreement process provides for a 45-day period, beginning with the day the challenge is made, where the engager must either:
- inform the worker or deemed employer that they believe, after consideration, that the conclusion is correct; or
- 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.
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.
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.
The pension contributions that were mooted in the consultation document have not been included.
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.
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Rebecca is a leading expert in ‘employment status’ and IR35 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 covering all employment status issues such as off-payroll in the private and public sector, otherwise known as IR35...