The government consulted on how the off-payroll workers legislation should be implemented earlier this year. The decision was already made by the Chancellor who announced in the Budget of 2018 to go ahead and extend the IR35 legislation from the public sector, which was introduced in 2017, to the private sector from April 2020.
It is vital that those people who work through an intermediary - such as their own personal service company (PSC), agencies, accountants and agents who engage the services of a worker, HR managers and of course anyone involved in payroll - are aware of these changes, as now it is the responsibility of an employer or engager to assess a worker’s status to determine whether self-employed or an employee when engaged directly.
Private Sector
It is this assessment that will from 6 April 2020, have another category “off payrolling” for the private sector. One could argue that it does exist now, but as many will know determining and wading through the IR35 mud can be difficult. Currently (outside of the public sector) individuals engaged through a PSC assess their own employment status (to decide whether the off-payroll rules apply). Reform of the off-payroll working rules will shift the responsibility for this assessment from the worker’s PSC to the medium or large organisation from April 2020, as well as the responsibility for deducting the appropriate tax and National Insurance - where someone is found to be working in a manner akin to employment.
Check Employment Status for Tax (CEST)
We currently use what was called the Employment Status Tool to help us determine employment status, and when this legislation was introduced to the public sector, the tool was revised to encompass this legislation and became the Check Employment Status for Tax (CEST) tool. It should be acknowledged that HMRC are working on making the tool more robust/enhanced and helpful to employers pre 2020. It is expected the changes will include enhancements such as adding further questions to cover further factors to help decide the employment status and improved clarity and accessibility. Guidance will also be improved.
The aim of this legislation is to ensure those individuals, who work as employees, pay broadly the same amount of employment taxes and National Insurance contributions. In a nutshell employers/agents etc. will need to undertake the CEST test as it is mandatory, and if it determines an off payrolling worker, then the tax and NICs will need to be deducted from the service amount charged. This is required by the time the contract starts or before the worker provides their services. It should be noted that once a determination has been made, the party the client contracts with (client is if through another person or entity), has a legal right to ask for reasons, so perhaps it would be wise to keep a copy of the information input into the CEST tool and its outcome. This isn’t currently required for the public sector but will be from 2020 to both the private and public sectors. If the client doesn’t provide the determination or delays providing it (within 45 days), the liability of tax and NICs falls on the client - albeit they can later rectify it - and remains the client’s liability until a determination is made. The legislation intends for all parties to be made aware of the determination.
The original consultation document provided an illustration as to how this might work, which would mean all parties involved would be notified, and sought views as to whether this admin burden would be worthwhile in providing workers sufficient certainty on their tax position.
The legislation is expected to impact around 170,000 individuals working through their own company but who would be deemed employed if engaged directly. Interestingly, it is acknowledged that the degree of change required by businesses is expected to be significant but varied, with some realising savings through reduced admin requirements.
According to the impact assessment, there will be ongoing savings for around 230,000 PSCs who will no longer have the requirements for determining status or the associated accounting burdens. It is expected that up to 60,000 engager organisations outside the public sector are in scope for the new rules.
The consultation document was also seeking views on whether there are circumstances in a breakdown of the determination not reaching all those involved in the chain. One example where this might happen is with offshore PSCs; will it always be possible for the client to identify the fee-payer? It should be noted that where a fee-payer is off-shore the liability sits with the nearest entity in the supply chain that is onshore.
The consultation document went into some detail around where disagreement about the determination is reached. I recall many years ago if payroll were unsure as to whether someone was self-employed or not, they would be deemed an employee and would leave the individual to sort it out with HMRC. This I might add wasn’t done out of laziness, it was due to ambiguity and employers didn’t want to risk getting it wrong. The legislation is intended to make it very clear when the rules apply, presumably to prevent employers from adopting a “one size fits all” approach and instead assess each worker. It does also state there may be circumstances when batching workers doing the same role may be appropriate.
It is expected that a client-led status disagreement process should be conducted, which could be tailored to fit with the wider business rather than through HMRC. The government doesn’t believe it will cause a burden, as it has assumed larger organisations will have sophisticated HR processes in place. In reality, it is most likely that payroll will have the responsibility as it is in respect of payments, rather than HR.
As you would expect, the consultation document also examined the options for non-compliance and again provided a great illustration of what would happen in these circumstances. There are a number of questions asked in this area such as; who would the liability of unpaid taxes fall to if the first agency couldn’t pay? The liability can be passed on to the end-engager/client, where they haven’t taken reasonable care in making their determination, or when the supply chain has not been compliant
What size of business has to consider this legislation?
Whilst I am pleased this burden won’t be passed to small businesses, there is some concern it might cause confusion, especially when as a payroll bureau we would need to ascertain whether a client should be processing some of their service contractors through a payroll.
The legislation defines the following:
For corporates
If the small company’s regime set out in the Companies' Act applies, then you are considered small within the off-payroll working rules.
So if two of the following apply a company is not small.
Annual Turnover: Not more than £10.2 million
Balance sheet total: Not more than £5.1 million
Number of employees: Not more than 50
Determining a company’s size will be based on the financial year and will apply for the tax year following the filing date.
Non-corporates (not governed by the rules of the Companies Act)
i.e. sole traders, simple partnerships etc.
Whether the rules apply will be based on turnover (£10.2 million).
The timing will be based on the calendar year.
How we process these workers through the payroll
As now for the public sector, the fee payer (client) will act as an employer and deduct PAYE, National Insurance (employee and employer) and include for the calculation of the apprenticeship levy. This means you take the service cost exclusive of VAT and calculate monies due, add any allowable non-taxable expenses to it, plus the VAT, equates to the payment made to the worker;
The real time information rules apply i.e. must be reported on or before payment is made;
No student loan deductions can be taken (I hope HMRC fixes their system so no student loan notice is sent or amends the payroll process to allow us to state an off payroll worker?);
Employment Allowance – this will only apply on secondary contributions (employer) where there is a mix of employees and this type or worker; where a payroll is run purely for this category the allowance will not apply. There are also changes to this allowance or “State Aid” as it is planned from 2020 where many in scope might not qualify anyway?
There is no entitlement to statutory payments as not deemed an employee;
The worker’s PSC will not be permitted to deduct a 5% allowance in relation to engagements with medium and large size clients;
Double taxation rules will continue to be applied as long as any corporation tax computations are adjusted;
There are some other considerations, for example, around agency workers, outsourcing (payroll bureau for example wouldn’t fall under this as a service provider). There will not be any automatic enrolment obligations leaving any pension arrangements to be made by the individual.
From a practical point of view, businesses will need to review any and all their service contracts to ascertain whether this legislation will apply. Payroll will need to help educate businesses, and in our case clients, to ensure they are aware of this legislation. We do not believe we will be able to carry out the checks for them, as we will not have all the required information. As the obligation will fall to the fee payer it is unlikely the worker can undertake the test, so the administration will fall to the business fee payer.
