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Off-payroll working rules in the private sector

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HMRC has published a consultation document seeking views on the detail of how the off-payroll working (IR35) rules will apply to medium-sized and large businesses in the private sector from April 2020. This follows introduction of the rules in April 2017 to engagements in the public sector and the government’s announcement at Budget 2018 of its decision to extend these reformed rules to the private sector.

HMRC estimates that the public sector off-payroll rules raised an additional £550m in income tax and NICs in the first 12 months after they were introduced in April 2017. According to government estimates, tax lost through non-compliance with IR35 rules in the private sector will amount to some £1.3bn a year by 2023/24.

From April 2020, where an individual is engaged by a medium-sized or large business and works through a company, the business will become responsible for assessing the individual’s employment status. If the rules apply, the business, agency or third party paying the individual’s company will be responsible for deducting income tax and NICs through PAYE, as for employees, and paying employer NICs.

The consultation acknowledges that the public sector rules will require some modification to reflect the needs of private sector organisations and the wider range of activities they undertake.

A change is proposed to the information requirements, with express provision in legislation to ensure that when an engager gives a status determination, with reasons, to the party with whom it contracts directly, that determination is also provided to all parties within the labour supply chain. This will make clear that the engager must give the status determination for each engagement not only to the contracting party, such as an agency, but also to the off-payroll worker, as well as fee-payers further down the labour supply chain.

Where the organisation paying the worker’s personal service company is offshore, the fee-payer responsibilities move up the supply chain to the next UK-based entity. The consultation seeks views on how the engager may be in a position to identify the fee-payer in such circumstances. Where a potential fee-payer has not received a determination, it would not be required to make any income tax and NICs deductions, or pay employer NICs, until such a time as it has received a determination.

The consultation asks for more information about the length of a typical labour supply chain in the private sector and the role of any intermediary parties in the chain.

Modified rules will determine when the liability for tax and NICs should be transferred. The government proposes that liability should rest initially with the party that has failed to fulfil its obligations, until such time as it meets those obligations. This means liability would move down the labour supply chain as each party fulfils its obligations. If, for example, an agency failed to send on the status determination, it would be liable for any tax and NICs due. Similarly, if a fee-payer failed to make deductions from any payments made to the worker’s personal service company after receiving the determination, it would become liable.

Private sector organisations that contract-out services to a third party will not be required to apply the off-payroll rules, as for public sector bodies. In such cases, the third party will be required to consider whether the off-payroll working rules apply.

The consultation considers introducing a client-led process for resolving disagreements over status determinations. To facilitate this process, the government proposes to give off-payroll workers and fee-payers the right to seek the reasons for a status determination directly from the engager.

Smaller private sector businesses will not be affected by the changes and will not need to determine the status of the off-payroll workers they engage. The government intends to use the existing statutory Companies Act definition to determine whether or not a company is small, which requires at least two of the following three conditions to be met: annual turnover not exceeding £10.2m; balance sheet total not exceeding £5.1m; and not more than 50 employees.

For non-corporate engagers, two options are proposed for determining whether a business is ‘small’. These look only at turnover and the number of employees and would apply the reform either to:

  • unincorporated entities with 50 or more employees, as well as to entities with turnover exceeding £10.2m; or
  • only to unincorporated entities that have both 50 or more employees and turnover exceeding £10.2m.

The consultation also sets out how the off-payroll rules will interact with the agency legislation, umbrella companies, managed service company legislation and the construction industry scheme.

The government intends to include legislation in the draft Finance Bill 2020 to be published this summer.

HMRC intends to test improvements to the ‘check employment status for tax’ (CEST) service with stakeholders before the reform is implemented.

As a preliminary to the government’s education and support package, the consultation recommends businesses take the following actions now to prepare for the changes in April 2020:

  • identify and review current engagements with intermediaries, including personal service companies and agencies;
  • review current arrangements for the use of contingent labour, particularly within organisation functions that are more likely to engage off-payroll workers;
  • put in place comprehensive, joined-up processes (include procurement, HR, tax and line management functions) to get consistent decisions about the employment status of the people they engage; and
  • review internal systems, such as payroll software, process maps, HR and on-boarding policies to see if they need to make any changes.



Issue: 1434
Categories: News