Where the rules do apply, the organisation, agency, or other third party paying the worker’s company will need to deduct income tax and employee NICs and pay employer NICs.
These reforms do not introduce a new tax and do not apply to the self-employed, who are outside the scope of the existing rules.
These reforms were introduced in the public sector in 2017. At Budget 2018, the Government announced that it would be introduced to other sectors from April 2020, giving organisations time to adjust and prepare.
The new rules, which are being introduced from April 2020, will require private sector organisations, who engage workers via a personal service company (PSC), or similar intermediary, to carry out checks to decide whether the worker should be treated as an employee or as self-employed for tax purposes.
If the tests indicate a relationship that is considered to be more like an employment relationship, it will be the client’s responsibility to operate pay-as-you-earn (PAYE) and national insurance contributions (NICs) on any payments they make to the PSC. This responsibility previously lay with the PSC but, in HMRC’s experience, less than 10% of such organisations complied with their responsibilities. HMRC estimated that the tax cost could be as much as £1.3bn in 2023/24.
These rules were already introduced for engagers in the public sector, but companies need to be aware of the additional responsibilities brought in by the new rules, which will apply to all medium and large organisations in the UK.
HMRC put a number of key areas out to consultation, and their latest announcements bring clarity to these areas -
Size of organisation to which the new rules apply
- Only companies that are not “small”, as defined by the Companies Act 2006, will be subject to the new off-payroll working rules
A small company must meet two of the following qualifying conditions:
- An annual turnover not more than £10.2m
- A balance sheet total not more than £5.1m
- No more than 50 employees
If these are not met in two consecutive years, that company will no longer be classed as small and would be required to apply the new off-payroll working rules from the start of the tax year following the filing date when the company is no longer “small”.
For unincorporated organisations, HMRC has recognised that a more straightforward condition should be applied -
- Any organisation whose turnover exceeds £10.2m in one calendar year must operate the off-payroll working rules from the start of the following tax year.
This means that unincorporated organisations will be required to keep detailed records of their turnover per calendar year, even if this differs from the period over which they draw up their accounts.
Provision of information -
- The new rules will require engagers to pass details of their employment status determination and the reasons for that decision down the contractual chain to each involved party
- This could include one or more agencies as well as the PSC, as well as directly notifying the worker
- Every medium and large organisation in the UK, as per the definitions above, will need to have a procedure in place to make the required status determinations and to pass the result of that determination to the worker and the fee-payers in that chain.
- It will also be important for companies to consider how they get around any GDPR/data privacy issues arising from this new process.
The draft HMRC guidance at the time of writing states that:
Where HMRC is satisfied that there is no realistic prospect of recovering the tax, NICs and apprenticeship levy liabilities due from the fee payer/deemed employer, HMRC may decide to recover the debt from other persons; this could be the first agency in the chain (the agency the client contracts with) or the client.
As an example, an end client contracts with agency 1 for the provision of labour. Agency 1 subcontracts the provision of labour to agency 2. Agency 2 then contracts with a worker’s intermediary for the provision of the worker’s services to the end client. If all conditions within the legislation are met then agency 2 is the fee-payer and is responsible for operating PAYE on payments and remitting tax and Class 1 NICs to HMRC.
If agency 2 fails in that obligation, and HMRC is unable to collect the income tax and NICs from agency 2, then HMRC may seek to recover from agency 1 first. This is the case even if there are more agencies in the contractual chain between agency 1 and the fee-payer. If HMRC cannot collect from agency 1, then HMRC may seek recovery from the end client.
HMRC would not seek to recover the income tax and NICs from agency 1 where they cannot be collected from agency 2 as a result of a genuine business failure.
Dealing with disagreements -
- It is fairly certain that there are going to be instances where a worker and their client disagree with a determination of employment status.
- HMRC has clearly stated that they will not be involved in any disagreement resolution, suggesting that the worker and client are likely to be best placed to assess the status of their relationship
- Companies will have to have some form of “status disagreement process” under which they can consider instances where there is a disagreement over determination.
- Without having a process in place, a company may end up with a liability for tax and NIC
As a minimum the legislation requires the client to:
Consider the worker’s and/or the deemed employer’s representations. These representations could be made verbally or in writing.
Respond to the worker and/or the deemed employer’s representations within 45 days beginning with the day the representations are received, not from when the SDS was issued.
Inform the worker or deemed employer that they have considered their representations and that they have decided that their original SDS was correct and provide reasons, or
Inform the worker and deemed employer they have considered representations and decided the original conclusion was wrong, provide a new SDS and state that the previous SDS is withdrawn.
Take reasonable care in making any new SDS and ensuring it contains the reasons for reaching that conclusion.
The basis of the new regulations is that it is fair that two individuals working in the same way pay broadly the same income tax and National Insurance contributions (NICs), even if one of them works through a company.
The off payroll working rules were originally introduced in 2000 and require that individuals who work like employees, but through their own company, pay similar taxes to other employees. Those who do not comply with the rules pay significantly less income tax and NICs than an equivalent employee.
HMRC IR35 Tool
HMRC has updated their Check Employment Status for Tax (CEST) service to help organisations determine whether the off-payroll working rules apply.
The changes to the rules for off-payroll working are not retrospective. HMRC will focus on ensuring businesses comply with the reform for new engagements, rather than focusing on historic cases. HMRC has also confirmed that they will not carry out targeted campaigns into previous years if individuals start paying employment taxes under IR35 for the first time. An organisations’ decisions about whether these workers fall within the rules will not automatically trigger an enquiry into earlier years.
It is not intended that these reforms will not stop anyone working through a company if that suits them, however the taxation of this work may no longer be beneficial to the individual.
HMRC have heavily updated their Employment Status Manual (see here) to help organisations implement the off payroll working rules to ensure they apply them correctly. How to Prepare
1. Look at your current workforce (including those engaged through agencies and other intermediaries) to identify those individuals who are supplying their services through PSCs.
2. Determine if the off-payroll rules apply for any contracts that will extend beyond April 2020. You can use HMRC’s Check Employment Status for Tax service to do this.
3. Start talking to your contractors about whether the off-payroll rules apply to their role.
4. Put processes in place to determine if the off-payroll rules apply to future engagements. These might include who in your organisation should make a determination and how payments will be made to contractors within the off-payroll rules.
Operating PAYE and NIC
Where a deemed employer has to make a payment to the worker, this is to be treated as earnings from an employment, called a deemed direct payment. The payment is taxable in the same way as employment income, and PAYE and NICs should be operated on it.
The deemed direct payment is calculated as follows:
Identify the amount of the payment net of VAT.
Deduct the direct cost to the intermediary of materials used, or to be used, in the performance of the services.
Deduct the amount as represents expenses met by the intermediary that, would have been deductible from the taxable earnings if;
- The worker had been employed by the client and
- the expenses had been met by the worker out of those earnings.
If the amount resulting from step three is nil or negative there is no deemed direct payment, otherwise the resulting amount represents the deemed direct payment.
When a deemed employer operates PAYE, they should do this through payroll. Employers have the option of adding these workers to their existing payroll, or setting up a separate payroll. When calculating the PAYE and NIC the following is applicable:
- Workers’ should be added to payroll like any other starter would be. They should be issued a starter checklist so they can provide the deemed employer with the information they need to run payroll.
- The declaration the worker chooses on the starter checklist will determine their tax code. Usually this will be declaration C as the worker will already have a primary employment with their intermediary. This would put them on tax code BR. 0T week 1 / month 1 would apply if the worker does not return the starter checklist.
- HMRC can then issue another tax code if it is required.
- Devolved powers that affect tax codes would apply as normal, for example Scottish rates of income tax.
- When running payroll, the RTI flag should be set to show the individual is an off-payroll worker.
- Benefits in kind are treated in the same way under the off-payroll working rules. So Class 1A NICs should be calculated and paid to HMRC and P11D forms completed.
- Deemed employees can also be taken off the payroll in the same way and given a P45.
- Deemed employees can also be given a P60 at the end of the tax year.
- You should apply the apprenticeship levy and make any payments necessary.
Employment Allowance cannot be used against payments to deemed employees and the secondary NICs relating to off-payroll workers doesn’t apply towards the Employment Allowance limit.
Deemed employers are not obliged to offer pension schemes to deemed employees (including auto enrolment).
Deemed employers should also not deduct student or post graduate loans. Workers will make repayments through SA.
The new rules determine employment status for tax, they do not decide employment status for rights.
For both tax and NICs the legislation treats the payment to the worker as made at the same time as the payment made by the deemed employer. It is the time at which the payment is actually made, not the invoice date, which determines the date the earnings are treated as made. It will be this date used within the payroll. Usual rules around NICs periods apply regarding regular and irregular payments. For example, if payments are made each month, the period is monthly even if in one period two invoices are paid. The NICs period is when the money is made available, so this will also be based on when the payment is made.
If work is done in one month but not paid until the next then it is the latter month which defines the payment dates as this is when the payment was made.
Where payments are subject to PAYE you do not need to consider the Construction Industry Scheme. If the off-payroll working rules do not apply, the party receiving the worker’s services must then consider whether tax needs to be withheld on payments under the CIS rules. If the party receiving the worker’s services is small under the off-payroll working rules, then the worker’s intermediary would be responsible for determining whether the off-payroll working rules apply.