Get to grips with the change
The government is proposing new off-payroll working rules for the private sector from April 2020. Broadly, the off-payroll rules (IR35) introduced in 2000 aim to ensure individuals working through an intermediary – usually a personal service company (PSC) – who would be regarded as employees if engaged directly by the client, pay mainly the same income tax and national insurance contributions (NICs) as if they were employed.
Under the current rules, the intermediary determines whether IR35 applies and pays tax and NICs if necessary. This means the tax risk currently lies with the intermediary rather than the client. Under the new off-payroll working rules, it will be for the engaging business to determine whether IR35 applies and, if so, to make the necessary deductions for tax and NICs and pay employer NICs.
Determine if the new rules apply to your business
The reforms will apply to medium and large businesses, but not small businesses. To be considered ‘small’, a business would need to satisfy two or more of the criteria in the Companies Act 2006: (i) have an annual turnover that is not more than £10.2 million; (ii) have a balance sheet total of not more than £5.1 million; or (iii) have no more than 50 employees. The government is currently consulting on thresholds for unincorporated entities, which are likely to be based on the turnover and employee number.
Decide who should be responsible
Some businesses will prefer that this issue is dealt with by procurement, or those making the decisions to engage contractors. Others may want HR or legal to sign off on any contracts deviating from past practice, or contracts above a certain value. For large businesses, which retain contractors in different ways, an internal code of practice or decision tree will be invaluable.
Train those who need to know about the new rules
The training needed will depend on who is responsible for contractor arrangements, but it is important to ensure those engaging contractors are aware of the basics of the regime and who to contact internally with any queries or before entering into new arrangements.
Audit your contracting arrangements and labour supply chain
We recommend businesses undertake an audit of the arrangements under which they engage contractors through an intermediary, including whether these are expected to change in the near term. This process will help you assess whether your business is responsible for making a determination on the application of IR35 to a contractor and will inform your business’s approach to preparing for the new rules.
This audit should include a consideration of which contractors engaged through an intermediary currently fall within IR35. The government has created a tool for this (Check for Employment Status Test – CEST), and businesses who fill out this tool correctly and receive a response that the contractor is genuinely self-employed should be able to rely on this if HMRC questions their determination of a contractor’s tax status.
However, determining employment status with any certainty remains legally complex and concerns about the CEST tool have been raised.
If a chain of intermediaries and contractors is used to provide a contractor’s services, your business may not be the entity required to consider tax status and/or withhold income tax and employee NICs and pay employer NICs.
Beware employment status
The tax status and employment status rules are separate. However, it is anticipated that a contractor who is determined to be employed for tax purposes may claim they are also an employee or worker for employment status purposes. Contractors may therefore demand additional rights and/or payments on this basis.
Determine an approach for your business
If a contractor is determined to be genuinely self-employed, income tax and employee NICs are not deducted, and employer NICs not paid.
If a contractor is determined to be employed for tax status purpose, but tax and NICs are not currently deducted, you will need to:
- Notify the contractor that you have determined the off-payroll rules apply to them and that you will be deducting tax and NICs from their fee in future.
- Amend contracting arrangements so the contractor is genuinely engaged on a self-employed basis. However, bear in mind that HMRC looks at the reality of the situation rather than just the contract, so any such changes do need to be carried out in practice.
- Engage current and future contractors as employees or workers, acknowledging that although this brings certainty it will give rise to extra employer costs including holiday pay, pension contributions and sick pay.
Many businesses engage contractors under a variety of arrangements and for a range of purposes, so a mixture of the above may be suitable. Businesses should avoid making blanket decisions with regard to the application of the new working rules.
Budget for the new arrangements
This may include additional fees or payroll costs and internal compliance costs, and should be kept under review as negotiations with contractors progress.
Speak to your contractors
Your business should settle any required amends to arrangements before 6 April 2020. Existing engagements may have long notice periods for termination and, if necessary, it is best to have the option to terminate before then.
The government is currently consulting on the new working rules. One of the key proposals 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 consultation closes on 28 May 2019.
Sarah Ozanne is an employment lawyer at CMS