A little quicker off the mark than many had anticipated, HMRC have published the consultation document ‘Off-payroll working rules from April 2020‘ which will run for 85 days, closing on 28th May 2019.
Ostensibly, the off-payroll rules will mirror those currently in place for the public sector but with some tweaks. This is because the government acknowledges that the needs of private sector organisations are different to those in the public sector, and that the range of activities carried out are much more diverse.
The extension of the existing rules to cover independent contractor usage is due to begin on 6th April 2020, with the consultation making it clear that the public sector rules will serve as the starting point when the private sector rollout begins. This consultation period is intended to gather comments from stakeholders on the proposals put forward by HMRC. Here’s what you need to know.
Who will be affected?
Only medium and large-sized organisations will have to consider whether or not the off-payroll rules apply to an engagement as from April 2020. It is the government’s intention to use the definition of a small company as the yard stick for measuring if a company is small or not. This is contained in S.382 Companies Act 2006, which states that a company qualifies as ‘small’ if it satisfies two or more of the following requirements in a year:
- Annual turnover of not more than £10.2M
- Balance sheet total of not more than £5.1M
- Number of employees of not more than 50
Companies in small groups, as defined by S.383 Companies Act 2006, will also qualify as ‘small’.
To prevent parties that are connected to, associated with, or controlled by the end client, from taking advantage of the small companies exemption, anti-avoidance measures will be considered.
What about non-corporate end clients?
As the Companies Act definition does not apply to non-corporate entities, the consultation document proposes two options, albeit by reference to that definition:
- An organisation with 50 or more employees or with a turnover in excess of £10.2M; or
- An organisation has 50 or more employees and a turnover in excess of £10.2M.
Both tests would be measured on an annual basis in the same way as the Companies Act test.
When an organisation becomes, or ceases to be small in an accounting period, for the purposes of the off-payroll rules, that change will apply from the start of the tax year following the end of that accounting period regardless of whether they are incorporated or not.
PSCs contracting to small organisations in the private sector will remain responsible for assessing their own IR35 risk.
Where a potential fee-payer has not received a determination, it will not be required to make any PAYE tax and NIC deductions.
Tell it to the worker
There is currently no requirement for the end client to provide the contractor with a determination of their status nor for the worker or fee-payer to seek the reasons for a decision. Legislative changes will therefore be made to ensure that the determination and reasons for such is disseminated to all parties within the contractual chain. This will be backed up with clear guidance.
The government understands that end-clients regularly provide fee-payers with determinations within the public sector.
Transfer of debt
Where HMRC does not receive the PAYE tax and NIC, it is proposed that the liability should initially rest with the party that has failed to fulfil its obligations until such time that it does. This means that liability would move down the contractual chain as each party fulfils its obligations. For example, if an agency in a chain failed to pass on a determination, that agency would be liable for the tax and NIC. Similarly, if a fee-payer, having received the determination failed to make the necessary PAYE and NIC deductions, then it would become liable.
Where HMRC are unable to collect tax and NIC arrears from one party, e.g. because it ceased to exist, then the document proposes that the debt should transfer back to the first party or agency in the chain. Where this is not possible, then the end client would be left holding the baby.
Resolving status disputes
Making blanket assessments based on a role or on a group of contractors working in the same role is simply the wrong approach. HMRC, however, believe this may be appropriate in some circumstances. This would only be acceptable to the department where IR35 was found to apply and not the other way around, of course.
The document suggests that where a role and contract have been previously assessed as inside the off-payroll rules, an organisation can be in a position to determine the status of the role at the time of advertising. Wrong! This is pre-determination but something that HMRC are very good at when it comes to IR35.
There is currently no formal appeal process whereby a contractor can challenge a determination by the end client but the government believes that by making it compulsory for the end user to provide the contractor with this information, and the reasons for reaching their conclusion, then this will go some way to addressing this concern. Whilst this helps, it certainly doesn’t resolve the issue.
Rather than putting in place a formal appeal process, the government is passing the buck to the end client. Organisations would therefore need to put in place a process which allowed for their decisions to be challenged where necessary. As a minimum, such a process would have to include evidence offered by the contractor and/or fee-payer. This may not be such a bad thing, as end users may be more persuaded by rational argument than HMRC are.
As justification for this proposal, the government’s view is that the end client will have met its duty to take reasonable care in reaching a status decision.
The off-payroll rules do not apply where a public authority has fully contracted out services to a third party, e.g. an outsourcing company, where the workers do not personally provide their services to the end user. This will continue to be the case for both the private and public sector from April 2020, although the consultation document states that the third party will be required to consider the application of the off-payroll rules and, where the rules apply, to deduct and pay the appropriate tax and NIC. Surely though, this should only be the case where the third party is not ‘small’?
Since CEST was launched in 2017, it has come under much justified criticism due to it not taking account of existing case law and ignoring a number of employment status tests. HMRC is currently working to improve both the tool and guidance so that status decisions can be understood and made with some degree of confidence.
Legislative options are to be considered to allow fee-payers to make pension contributions free of tax and NIC to the workers’ personal pension but how likely is this to be taken up?
Implications for recruiters
It would be wise for recruitment agencies to keep a close eye on the proposed reform. As the Legal Manager of Kingsbridge Contractor Insurance Nicola Hayman notes:
“The new transfer of debt provision proposed in the consultation is a positive step towards transparency and compliance in the recruitment supply chain and should help reduce the involvement of unscrupulous companies. However, it comes with an added burden to the agency/MSP who hold the contract with the end client.
If there is failure to remit PAYE tax and NICs the liability can transfer back to the first party or agency in the chain. This company “Intermediary 1” will have a significant role to play in protecting themselves, their agencies and their clients by ensuring that their process is fully compliant and poses zero risk to everyone involved.”
Andy Robinson, Head of Business Development at Kingsbridge Contactor Insurance, echoed those calls and emphasised the benefits of nurturing a compliance culture:
“Following the correct compliance procedures can give recruitment agencies a significant competitive advantage over their competitors. Alongside reduced levels of balance sheet and litigation risk, a compliant agency will also find itself to be a much more attractive offering for MSPs and RPOs and will have an improved likelihood of passing end client audits.”
Take action now
Those end client businesses that will be affected by the changes in April 2020 should be preparing for the reform now, by:
- Identifying the number of contractors they engage;
- Identifying the tax and NIC risk;
- Reviewing the current contractual and working arrangements between themselves and the workers engaged via PSC’s;
- Putting in place robust and consolidated processes for assessing and arriving at consistent decisions about the employment status of contractors; and
- Reviewing internal systems, such as payroll software and on-boarding processes and making changes, where necessary.