Finance Act 2020, which contains the legislation implementing the new IR35 administrative rules received royal assent on 22 July. From April 2021, medium-sized and large end users (as well as public sector engagers) of services provided by off-payroll workers operating via an intermediary, such as their own personal service company (PSC), will be required to assess whether these new IR35 rules apply to their engagements with off-payroll workers. The rules apply for both direct engagements (ie those where the end-user enters into a contract directly with the worker’s intermediary) and those where the off-payroll worker is indirectly sourced via an agency or other third party. If engagements are caught (ie the relationship is a disguised employment and the engagement is ‘within IR35’ ) the fee-payer (being the party which pays the worker’s intermediary/PSC) will be required to operate tax, National Insurance contributions (NIC) and apprenticeship levy, where applicable, under PAYE on any deemed employment income arising under the engagement for services provided by the worker from 6 April 2021.
Brief overview of the steps required for compliance
Organisations should be looking at how they will comply with the new rules from April 2021 (which include changes to the existing similar rules for payments made by those operating in the public sector from 6 April 2021 ). Broadly, ‘end-users’ must take the following key steps:
- Determine if the contract is for fully outsourced services or for personal service which might be caught.
- Determine the type of entity engaged - PSC/Limited Liability Partnership etc - and whether the conditions of liability, which broadly means does the worker own part of the business, are met.
- Undertake (taking reasonable care) a status determination and provide the contractor and the third party they contract with, such as an agency, with a status determination statement (SDS), setting out the reasons for the assessment.
- If the arrangement is one of ‘deemed employment’, operate tax and NIC via payroll if they are the fee payer.
- Set up a disagreement/appeal process which meets the statutory requirement so workers or the fee payer can challenge the status determination. There are set time limits within which a disagreement can be raised. End users will need to respond to any appeals to their status determinations within 45 days of receipt.
- Undertake due diligence to protect themselves from the transfer of debt provisions, which could result in a transfer of any tax and NIC liability due up the labour chain where there is a failure by the fee payer. It is reassuring that the technical note accompanying the draft regulations confirms that HMRC will not exercise their power to recover unpaid tax and NIC from the first agency or end-user where they cannot collect is as a result of a genuine business failure.
The rules may also apply where an individual works through an intermediary and the individual, intermediary, or end user are:
- abroad – HMRC has provided guidance in its employment status manual (see ESM10026) for the changes regarding end users based wholly overseas.
- working in the construction industry - these rules take precedence over the construction industry scheme.
For those still grappling with how to undertake and issue status determinations, HMRC has launched an enhanced online CEST (check employment status for tax) tool. HMRC employment status manual guidance (at ESM11005-ESM11170) has been added to ensure the questions are clearly understood by those using the tool.
What should you to do now?
There is a lot of work involved to be sufficiently prepared for the change and organisations need to start now, or dust off the work done previously and consider if this is still appropriate.
For more information please get in touch with Susan Ball, or your usual RSM contact.