Next April will see HMRC apply changes to the way off-payroll workers of medium and large organisations in the private sector are taxed. This move is an extension of the changes to off-payroll working rules that were applied to the public sector in 2017. Here, we take a look at the regulations.
The 'Intermediaries Regulations', also known as IR35
The Intermediaries Regulations, also known as IR35, apply to individuals who provide their personal services via an 'intermediary'. An intermediary may be another individual, a partnership, an unincorporated association or a company; however, the most common structure is a worker providing their services via their own company – known as 'personal service companies' (PSCs).
The rules are specifically designed to prevent the avoidance of tax and national insurance contributions (NICs) by those using PSCs and partnerships. The rules do not stop individuals selling their services through either their own PSC or a partnership. However, they do seek to remove any possible tax advantages from doing so. Instead of allowing contractors to extract taxable profits as dividends, thereby avoiding income tax and NICs, they would need to be paid as if the payment is a salary.
Introduction to public sector contractors
In 2017, HMRC took aim at 20,000 public sector contractors with the intention of raising £400 million by requiring some workers to pay income tax and NICs.
Those changes saw some contractors' net income cut significantly. HMRC also shifted the responsibility for compliance from the individual contractor to a public body or recruitment agency. The effect of these rules, if they apply, will be:
- the medium or large business (or an agency paying the PSC) will calculate a 'deemed payment' based on the fees the PSC has charged for the services of the individual
- generally, the entity that pays the PSC for the services must deduct Pay as You Earn (PAYE) and employee NICs as if the deemed payment is a salary paid to an employee
- the paying entity will have to pay to HMRC not only the PAYE and NICs deducted from the deemed payment, but also employer NICs on the deemed payment
- the net amount received by the PSC can be passed on to the individual without the company deducting any further PAYE and NICs.
The IR35 rules apply to individuals who would be classed as employees, rather than self-employed, if they supplied their services as an individual rather than through their PSC. So, an individual operating through a PSC but with only one customer for whom he/she effectively works full-time is likely to be caught by the rules. On the other hand, an individual providing similar services to many customers is far less likely to get caught in the net.
HMRC has made a tool known as the 'check employment status for tax' (CEST) tool. This is available for organisations that need to determine who IR35 applies to.
Extension to the private sector
HMRC intends to extend the off-payroll working changes to private sector contractors in April 2020, but the path to this deadline has proved to be a rocky one.
Following two consultations, the government has finally published draft legislation, which will, subject to further consultation, be included in the next Finance Bill. HMRC has also promised to keep working on the CEST tool, which has been heavily criticised for not being fit for purpose.
Next year's reforms will use the off-payroll working rules in the public sector as a starting point. The onus will be on organisations to make a determination of a worker's employment status and communicate the decision in a Status Determination Statement (SDS). The PSC worker may request the reasons for the determination, and if they disagree with the decision, the CEST tool can be used to check whether it was correct. However, the efficacy of the CEST tool is being questioned by many who consider that the law on status is too complicated to allow a simple yes/no checklist to provide the right answer in all cases.
The government will introduce a 'client-led status disagreement process' where the worker can make a representation to the medium or large business if they believe that the conclusion mentioned in the SDS is incorrect. The medium or large business has 45 days, from when the representation is received, to review the decision and either confirm the decision or give the worker a new SDS with a different conclusion. If the business confirms the decision, it must give its reasons for deciding that the conclusion is correct.
We are always on hand to answer any questions you may have about off-payroll working – simply contact us for more information.