7 minute read.
This article was first published in Tax Insider Professional in August 2019.
Sarah Bradford outlines the recent consultation proposals and sets out what clients can do to prepare for the off-payroll working changes to be introduced in April 2020.
Earlier this year, the government published a much-anticipated consultation on the reform of the off-payroll working rules (IR35) insofar as they apply where the end client is in the public sector. The consultation ran until 28 May 2019 and, at the time of writing, the government was considering the feedback.
The consultation looked at how the reformed public sector off-payroll working rules could be extended to the private sector. It also considered the scope of the reforms, the information requirements for those in the supply chain, and the procedures necessary for addressing status determination disputes. It will inform the legislation, and draft Finance Bill clauses are expected in summer 2019.
Off-payroll working – the story so far…
The IR35 rules were designed to ensure that where a worker provided his or her services to an end client via an intermediary, such as a personal service company, and (ignoring the intermediary) the relationship between the worker and the end client is one of employment rather than self-employment, the worker would pay broadly the same in taxes and National Insurance contributions (NICs) as would be payable if the worker was employed directly.
This is achieved by requiring the intermediary to calculate a deemed payment at the end of the tax year (deemed to be paid to the worker) on which tax and NICs are payable. Under the original rules, it is the intermediary who is responsible for deciding whether they apply – something which ultimately led to their reform.
One of the major problems with IR35 was that compliance was low. The fact that the decision on whether the rules applied was made at intermediary level made it very difficult for HMRC to police – the resources are simply not there to check whether every intermediary is complying and, even if they were, doing so is unlikely to be cost-effective.
Further, because intermediaries who failed to comply were unlikely to be brought to task, there was little incentive for them to understand and apply the rules.
Public sector reforms
In a bid to increase compliance in the public sector, the rules were reformed from 6 April 2017; the reformed rules applying where the end client is a public sector body.
Under the reformed rules, responsibility for deciding whether the off-payroll working rules apply, and applying them if they do, rests with the public sector body rather than with the intermediary. The public sector body must make a determination of the worker’s status, and where the worker would be an employee of the public sector body if the services were provided direct to that body, the fee payer (which may be the public sector body or a third-party, such as an agency) must deduct tax and NICs from payments to the intermediary as if the worker was an employee. If the public sector body fails to comply with the rules, they will face sanctions.
Moving responsibility up the chain makes it easier for HMRC to police – they can target one public sector body rather than considerable numbers of intermediaries. Research into the effectiveness of the reforms shows that compliance in the public sector has increased since they were introduced.
Extension to the private sector
Following a previous consultation from May to August 2018, it was announced at the time of Budget 2018 that public sector reforms would be extended to the private sector from 6 April 2020, but that they would only apply where the end client was a medium or large private sector business.
The latest consultation focuses on some of the detail.
What counts as ‘medium’ and ‘large’?
The reforms will only apply where the private sector end client is ‘medium’ or ‘large’. The consultation document suggests that the Companies Act definition (found in CA 2006, s 382) of companies ‘qualifying as small’ is used to identify those end clients falling outside the scope of the reforms.
Under this definition, a company is ‘small’ if it meets two or more of the following requirements:
- annual turnover is not more than £10.2 million;
- balance sheet total is not more than £5.1 million;
- the number of employees is not more than 50.
Companies in small groups (as defined by CA 2006, s 383) will also count as small.
The consultation sought views on the application of the definition to non-corporate entities for whom the balance sheet metric may not be appropriate. Options were for the reforms to apply to non-corporate entities which did not meet one of the remaining tests or those which did not meet both of the remaining tests.
Where a company either becomes small or ceases to be small within an accounting period, the reformed rules will cease to apply or start to apply (as appropriate) from the start of the next accounting period.
Where the end client meets the definition of ‘small’, the existing rules will continue to apply, and the personal service company will remain responsible for deciding whether IR35 is in point and applying the rules if it is. It is important, therefore, that workers know whether or not the end client to whom they are supplying their services is small or not.
Under the reformed rules, the end client must determine the worker’s status and provide a status determination to the party with whom they contract at the start of the contract or before the worker starts to provide his or her services. The recipient can ask for the reasons why the status determination given was reached, and the end client must provide an answer within 31 days.
If the client fails to do this, responsibility for meeting the tax and NICs passes to the end client until the reasons are supplied.
To ensure that all parties in the labour supply chain have sufficient information to apply the rules, legislation will require that the determination (and the reasons for it) are cascaded down to all parties in the chain.
The existing provisions in ITEPA 2003, Pt 2, Ch 10, which provide for the liability for tax and NICs to be transferred from one party to another where certain failures, such as a failure to make a determination, will apply to public sector end clients within the scope of the rules, providing an incentive to comply.
One size fits almost all
The public sector rules as adapted for the private sector will also apply to the public sector, so that there are a single set of reformed rules applying where the end client is either a public sector body or a medium or large private sector business.
The existing IR35 rules will continue to apply where the end client is a small private sector business.
Preparing for April 2020
Although the draft legislation has yet to be published, HMRC has published some guidance to help organisations prepare for the changes to the off-payroll rules from April 2020. They recommend that organisations:
- look at their current workforce (including those engaged through agencies and intermediaries) to identify those individuals who are supplying their services through personal service companies;
- determine whether the off-payroll rules will apply for any contracts that extend beyond 6 April 2020 (HMRC’s check employment status for tax (CEST) tool can be used to determine a worker’s status);
- start talking to contractors about whether the off-payroll rules apply to their role; and
- put processes in place to determine if the off-payroll working rules will apply to future engagements. These may include assigning responsibility for making a determination and determining how payments will be made to contractors who fall within the off-payroll working rules.
Clients providing services via a personal service company to a medium or large private sector business, who would be an employee if the services were provided directly, may wish to assess the benefits of staying ‘off-payroll’ – they may decide that without the tax and NICs savings, it is better to go ‘on-payroll’ and save the compliance costs and hassle associated with operating through a company.
Identify clients that may be affected by the changes to the off-payroll working rules as they apply to the private sector, and start a conversation as to what they need to do to be ready to apply them from April 2020.