Off-payroll working: How IR35 rules affect the private sector

Despite a raft of problems concerning IR35 “off-payroll” rules in the public sector, HM Revenue & Customs last week confirmed that from 6 April 2020, the tax regulations extend to the private sector. Caroline Harwood explains how businesses need to prepare.

Last week HMRC released its response to the consultation Off-Payroll Working Rules from April 2020. The new rules require private sector organisations, which engage workers via a personal service company (PSC), or other similar intermediary, to undertake checks to determine whether the worker should be treated as an employee or as self-employed for tax purposes.

If the tests indicate a relationship that is more akin to employment, it will be the client’s responsibility to operate pay-as-you-earn (PAYE) and national insurance contributions (NICs) on payments made to the PSC. Previously, the onus to do so lay with the PSC but, in HMRC’s view, less than 10% of such organisations actually complied with their responsibilities, and it estimates that the tax cost could be as much as £1.3bn in 2023/24.

These rules already apply to engagers in the public sector, but they also need to be aware of the changes brought in by the new rules, which will apply to all medium and large organisations in the UK.

Four key areas have been subject to consultation and these latest announcements bring clarity if no surprises.

1. Size of organisations to which the new rules apply

Only companies which 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, the company will cease to be small and must 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 acknowledged the need for a straightforward test, and those organisations 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 will mean that unincorporated organisations will need to keep detailed records of turnover per calendar year, even if this differs from the period over which they draw up their accounts, which will mean a further administrative burden.

2. Provision of information

The new rules will require clients to pass details of their employment status determination and the reasons for that decision down the contractual chain to each party (which could include one or more agencies as well as the PSC) in addition to directly to the worker.

This will mean that every medium and large organisation in the UK will need a procedure in place to make status determinations and to pass that information to the worker and the fee-payers in that chain. It will be important for companies to consider how they deal with any data privacy issues arising from this new process.

3. Dealing with non-compliance

This has been perhaps the most contentious area in the new rules as it is proposed that, if the PSC or any other party in the labour supply chain fail to account for PAYE and NIC, the liability will pass to the client as end user.

Many believe that this is an unfair burden on the client when they may have taken every step necessary in order to operate the new rules correctly. HMRC has noted this and, while the new legislation will pass the liability up the line, we are promised guidance on circumstances when HMRC will not seek to recover from the end user.

We await this guidance with interest because many clients would prefer the protection of law from unexpected and potentially unrecoverable liabilities.

4. Dealing with disagreements

It is clear that there will be cases where the worker and the client disagree with the client’s determination of employment status. HMRC has rejected the suggestion that it should be involved in resolution, suggesting that the worker and client are best placed to assess the facts and that there is no evidence to suggest that a blanket approach to status determination will be taken by clients.

As an aside, one does wonder how HMRC – with its already stretched resources – has the capacity to take on this additional burden. HMRC expects that medium and large organisations will have both the resources and expertise available, as well as the incentive (client liability) to make accurate determinations. This hot potato has been firmly placed in the hands of the client.

Clients will therefore need to put in place a robust “status disagreement process” and must respond to representations from workers where there is a disagreement over determination. Clients that fail to respond will be liable for the tax and NIC in point.

HMRC has promised guidance on how clients will fulfil their obligations to take reasonable care and how to implement a status disagreement process. This is promised before the legislation takes effect, but clients should start now to think about how their process will look.

5. Lack of confidence in CEST

HMRC has rejected proposals for tax and NIC relief for payments made by engagers into an off-payroll worker’s personal pension plan and no action will be taken to align the employment law definitions of status with those used for tax purposes, citing the need for careful consideration in order to avoid unintended consequences.

The story remains the same with regard to the Check Employment Status for Tax tool (CEST), which is intended to help clients with their status determinations, but CEST still fails to win the confidence of its intended users, particularly in light of HMRC’s failure in recent tax tribunal cases to apply the status tests correctly.

Finally, HMRC promises that a programme of education and a support package will be released this summer. However, we would encourage all organisations to take action now rather than to wait to evaluate the workforce and current policies, assess the level of risk and put procedures in place to ensure that they can comply with the new rules.