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.
- This area is still to be fully clarified by HMRC at the time of writing, and is possibly the most contentious area in the new rules.
- The current proposal is that if the PSC or any other party in the labour supply chain fails to account for PAYE and NIC, the liability will pass to the client as end user.
- Much of the feedback received by HMRC pointed out that this is an unfair burden on the ultimate client when they may have taken every step necessary to operate the new rules correctly.
- The new legislation will continue to pass the liability up the line, but HMRC have promised guidance on circumstances where they will not seek to recover any liabilities from the end user
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
- HMRC has promised that additional guidance on how clients will fulfil their obligations to take reasonable care and how to implement a status disagreement process.
- This guidance is promised before the legislation takes effect, but engagers should start now to think about what their disagreement process will look like
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 already developed 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 before the reform comes into effect.
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 stated that they will provide extensive support and guidance to help organisations implement the off payroll working rules to ensure they apply them correctly. This assistance will include the publication of detailed guidance and both general and targeted education packages, including webinars, workshops and one-to-one sessions with businesses in particular sectors.
Improvements to CEST are being tested and will be introduced in due course. Enhancements will be rigorously tested with stakeholders, and operational and legal experts, and will be available for use later in 2019.
How to Prepare
- Look at your current workforce (including those engaged through agencies and other intermediaries) to identify those individuals who are supplying their services through PSCs.
- 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.
- Start talking to your contractors about whether the off-payroll rules apply to their role.
- 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.
Deemed Employment Payments
As mentioned previously, the off-payroll working rules are being revised to make sure that individuals providing services through their own PSC pay broadly the same tax and National Insurance contributions (NICs) as an employee if they:
- provide their services to a client through their own intermediary (most commonly a limited company that they control)
- would have been an employee if they were providing their services directly to a client
Where the client is in the private sector and the off-payroll working rules apply, the intermediary will be required to calculate a ‘deemed employment payment’. This is the amount deemed to be the income of the worker, once deductions and employer’s NICs have been removed.
The intermediary will be required to:
- pay the employer’s NICs to HMRC
- pay any tax and other NICs due, at the end of the tax year
- take into account the deemed employment payment when paying Corporation Tax, paying dividends to shareholders or operating the Construction Industry Scheme (CIS) regime
The individual will also need to report information about any such engagements to HMRC on their Self-Assessment tax return, and pay any other Income Tax and NICs that are due.
Check If You Need to Calculate the Deemed Employment Payment
The individual needs to work out how much their intermediary:
- received in the tax year from off-payroll working engagements
- paid to the individual as employment income
There is no need to calculate the deemed employment payment if the amount their intermediary paid the individual as employment income was equal to, or more than, the amount it received from off-payroll working engagements in the tax year.
Calculate the Deemed Employment Payment
To calculate the deemed employment payment, the information required is:
- the payments received by the intermediary
- payments made to the worker (like salary, benefits in kind)
- pension contributions made for the worker
- expenses met by the intermediary
HMRC have published an IR35 - Deemed Employment Payment Calculator (Excel file) to calculate the deemed employment payment.
You can find more information on what costs to include and deduct in the guide on how to calculate the deemed employment payment.
If an intermediary supplies the services of more than one worker to a client under the same contract, they will need to calculate the deemed employment payment separately for each worker.
If a client makes a single payment to an intermediary for 2 or more workers, the income received must be split proportionally.
If the deemed employment payment is a:
- negative number (or 0) – there is no requirement to pay any further Income Tax or NICs, but evidence should be kept of the calculation and supporting information
- positive number - you must pay Income Tax and Class 1 NICs on this amount.
The intermediary is responsible for paying the tax and the employer and employee Class 1 NICs due on the deemed employment payment.
Either payroll software or Basic PAYE tools can be used to work out how much tax and NICs need to be paid on the deemed employment payment.
If an intermediary makes salary payments to the worker during the year, they are required to report these on a Full Payment Submission (FPS) on or before the time of payment. If they do not make salary payments then they should submit a return on an Employer Payment Summary (EPS).
The deemed employment payment should be reported on an FPS on or before 5 April each year.
The intermediary should include any deemed employment payments on a P60 form, which the intermediary must issue to employees by 31 May after the end of the tax year. If an intermediary cannot accurately calculate the deemed employment payment by the end of the tax year, they will have until the following 31 January to submit final figures and pay any balance of tax and NICs due, provided:
- they report a provisional calculation of the deemed employment payment on an FPS on or before 5 April
- make the appropriate payment of tax and NICs to HMRC
- and report final figures on an Earlier Year Update (EYU) or further FPS submitted on or before the 31 January following the end of the tax year
- pay a balancing payment of any additional tax and NICs due by that date
In these circumstances, interest will be due on the balancing payment but not a late payment penalty. This concession on penalties will be reviewed annually and notice will be given if it’s to be withdrawn.
Self-Assessment Tax Return
Any deemed employment payment is treated as employment income for the individual from their company or partnership. They should include this with any other employment income on their Self-Assessment tax return.
If an individual receives a salary from their intermediary, the intermediary will need to give the individual a P60 after the end of the tax year. The pay, tax and NICs details on the P60 should include any deemed employment payment as well as tax and NICs paid on it. The total P60 pay, tax and NICs figures will need to be entered on the employment page of the Self-Assessment tax return.
If only a provisional amount of tax and NICs has been paid when the individual gets their P60, the intermediary should give the individual a revised P60 with the correct deemed employment payment by the 31 January, after the end of the tax year. The individual should use the figures from the revised P60 on their Self-Assessment tax return.