Following on from its budgetary announcement last November, the government has now issued a consultation paper concerning its proposal to introduce a requirement that businesses be responsible for assessing the employment status of off-payroll (IR35) workers they engage. Payroll working rules have been in place in the public sector since 2017.
To date, the IR35 rules have left it to individuals working through an intermediary to determine their own tax status, and for those who would have been regarded as employees if engaged directly, it is for the intermediary to account to HMRC for the relevant tax and national insurance contributions.
Under the new system, it will be for the engaging business to make such a determination and, if necessary, to make payments of tax and national insurance contributions. The government has been keen to emphasise that this is not a new tax and that the new rules will not apply to off-payroll workers providing their services to small private sector clients after April 2020.
Much of the consultation focuses on the practical implementation of the arrangements and ensuring compliance, but also looks at the key issue of status determination and how such a determination can be challenged. One of the key proposals under the consultation is to require businesses to provide reasons for their status determination to the off-payroll worker and to have a client-led process for resolving disputes. Whether such a process will help or hinder working relationships is uncertain but it is intended that the final decision on status determination will remain with the engaging business.
The government recognises that the issue of status for tax purposes is separate from that for employment law purposes. This dichotomy is sharpened by the fact that tax law only categorises individuals as ‘employees’ or ‘self-employed,’ whereas employment law also has the intermediate category of ‘worker’.
The government published its Good Work Plan at the end of last year in response to the review on modern workplaces undertaken by Matthew Taylor. Employment status forms part of this review and acknowledges the current gulf between tax and employment law on this issue but no firm proposals have yet been put forward by the government to resolve it. It will, however, be a knock-on effect of the new off-payroll rules (as has been evidenced in the public sector), that individuals determined to be an employee for tax purposes may assert potential rights as workers or employees as a result. Businesses therefore face a double hit from these proposals.
Another undesirable impact of the new rules is that where they apply, the engaging business will be treated as an employer for the purposes of the apprenticeship levy. The tax and national insurance contributions paid in respect of the off-payroll worker will count towards the employer’s payroll bill for the purposes of calculating its liability to the levy. Depending on the number of such off-payroll workers that a business engages the impact of this could be significant, including potentially qualifying it to pay the levy when it has not previously.
With a year to go until the new rules are introduced in the private sector, now is the time for businesses to consider the potential impact. Organisations should ideally undertake an audit of their workforce to identify relevant individuals and their status. HMRC has created a tool to assist with this process, Check for Employment Status (CREST) – although in some instances this tool is not able to provide a definitive answer.
Businesses should also determine their approach to this issue which may include: adjusting the terms of new engagements to ensure that individuals are genuinely self-employed; acknowledging IR35 applies (with the costs and other risks that this brings); engaging individuals as employees in the first instance to ensure certainty for both sides or even terminating or renegotiating existing arrangements.
Sarah Ozanne is an employment lawyer with CMS