Following consultation in Spring 2019, the Government has published the draft legislation for extending and reforming the current off-payroll rules. These already apply in the public sector but are being amended and extended to the private sector from April 2020.
Users of off-payroll services need to urgently understand the impact for them ahead of the change. When the rules were introduced in the public sector it took time for organisations to adapt their processes and procedures ahead of implementation. The legislation is not expected to be finalised until November 2019.
Who is likely to be affected?
- Around 60,000 engager organisations, predominantly medium and large-sized businesses outside the public sector that engage with individuals through personal service companies (PSCs).
- Public sector organisations will also be affected by changes designed to improve the operation of the rules, for example around the employment status disagreement process.
- Recruitment agencies and other intermediaries, around 20,000 of whom supply staff through PSCs.
- An estimated 170,000 individuals who supply their services through an intermediary, such as a PSC, and who would be deemed employed if engaged directly.
Overview of the measure
The off-payroll working rules (IR35) have been in place since 2000. They were designed to make sure that an individual who works like an employee, but through their own limited company, pays broadly the same Income Tax and National Insurance contributions as other employees. The rules do not apply to the self-employed.
The proposed legislation brings medium or large-sized organisations in the private and third sectors within the scope of the rules introduced for the public sector in April 2017. It shifts the responsibility for deciding whether the rules apply away from the individual’s PSC, to the organisation that is the end user of the worker’s service. This includes responsibility for deciding whether the rules should apply. Responsibility for deducting the associated employment taxes and National Insurance contributions will rest with the worker's fee payer.
An estimated 1.5m small organisations are exempt.
What does the reform mean for organisations from 6 April 2020?
- Medium and large organisations outside of the public sector will need to decide whether or not the rules apply to an engagement with individuals who work through an intermediary. They will then have to provide the worker and the third party that they contract with, such as a recruitment agency, with a status determination statement setting out the reasons for that conclusion.
- All public sector organisations will continue to make determinations, but they will need to amend their current processes to meet the new obligations around status determination statements.
- All parties in the labour supply chain will need to pass on and be aware of the organisation’s (end user's) status decision and the reasons for that decision.
- A new statutory, client-led status disagreement process will apply which will allow individuals and fee-payers to challenge the organisation’s determinations.
- Where the rules do apply, the organisation, agency, or other third party paying the worker’s PSC will need to deduct PAYE and employee NICs and pay employer NICs and the apprenticeship levy (where applicable).
- Organisations will be expected to undertake due diligence of their worker supply chain as transfer of debt provisions apply in the chain, transferring PAYE and NICs liabilities where there has been non-compliance in the labour supply chain and where it is not possible to secure the tax liability from the non-compliant entity to the first agency and then to the client. However, we understand the proposals are not intended to transfer liabilities in cases of genuine business failure, where deliberate tax avoidance has not occurred.
What is not included?
The existing IR35 rules which require PSCs to determine their own status will continue to apply to engagements with the 1.5m smallest organisations. The legislation also covers when non-public sector organisations, including unincorporated organisations, are considered to be small. This is based around the Companies Act 2006 definition.
There is some good news, in that organisations will only be brought into the scope of the rules from the start of the tax year following the filing date at which it ceases to qualify as small.
In December 2018 the Government published its Good Work Plan, which set out its vision for the future of the UK labour market and which drew on many of the recommendations from the Taylor Review of Modern Working Practices, originally published in July 2017. This included proposals to look at aligning tax and employment rights, improving the current case law process for making determinations.
This has not been included in the legislation despite many people having problems with determinations. This includes Judges, who commented recently that clarity on the employment status test was badly needed.
What Government-provided help with be available?
- HMRC has the Check Employment Status for Tax (CEST) service to help organisations determine whether the off-payroll working rules apply. HMRC is working with stakeholders to enhance CEST and develop new guidance. However, the new version will not be available until later this year.
- HMRC will begin the roll-out of its education and support package over the summer. This will include the publication of detailed guidance for organisations and both general and targeted education packages, including webinars, workshops and one-to-one sessions with businesses in particular sectors.
RSM can help support you by:
- Working as a multi-disciplinary team with your project team we can bring tax, legal, HR, payroll, data analytics, audit and regulatory expertise where needed.
- Designing new processes and controls - helping you to manage changes, eg payroll, HR, finance, data management, including necessary IT solutions.
- Workshops or training - we can assist you with facilitated sessions to help you start your preparations for implementation and bespoke training on aspects of the new rules.
- Technology - using automation techniques to undertake PSC or equivalent identification and checks of contracts for risk criteria.
- Employment status - helping you devise a system, maintain an audit trail and review decisions as well as assessing the tax and employment law risks.
- Drafting communications to specific audiences including those impacted.
- Considering contractual amendments with for example PSCs and agencies you use to support with the transition to the new rules.
- Estimating any likely cost increases due to employer’s NIC and apprenticeship levy charges arising under IR35, and potential increases in contractors’ rates to assist in budgeting.
- Supply chain review and due diligence to ensure compliance to safeguard your risk whilst maintaining the flexible workforce.
- Dealing with off-payroll deemed employees - IT solutions, communications and running payments via payroll.
- Project management to assist you with getting ready on time.
- Audit or risk reviews of existing processes to ensure compliance, highlighting any risk areas.
- Advice to contractors to support them in understanding the rules and the implications, including cost modelling, status reviews, reviewing and planning their business structures.