Delayed, not diverted - off-payroll working reforms ahead
01 July 2020
Samantha Mann MCIPPDip MAAT, CIPP policy and research technical lead, provides an update on developments and issues an invitation
In the recent report Off-payroll working: treating people fairly (https://bit.ly/3cT7uOG), the House of Lords recommended “In the longer term the government should reassess the flawed IR35 framework, and give serious consideration to the fairer alternatives to the off-payroll working rules….”.
So where does that leave us as we consider the work needed to restart, or even to begin to start, the work needed in order to comply with the off-payroll working reforms that are due to continue from April 2021?
Well, the financial secretary to the Treasury, Jesse Norman MP has since confirmed the government’s intention to continue to roll out the reforms from April 2021. So, it would appear to leave us exactly where we were before, celebrating a slight delay but essentially still preparing for further reform.
IR35 was introduced in 2000 to address a situation which resulted when individuals who might previously have been employees went on to provide their worker services through an intermediary. An ‘intermediary’ may take many forms, but the most common occurrence is that commonly-referred to as director-owned personal services company (PSC).
The result of this arrangement sees the worker paying less in taxes due to the way they choose to pay themselves, comprising a minimal salary and dividend payments.
A press release numbered as ‘IR35’ introduced the requirement for the PSC to assess each contract of work to establish whether it was a ‘deemed contract’. Where that was established, the fee amounts were subject to pay as you earn (PAYE) income tax and class 1 National Insurance contributions (NICs).
HMRC have long-believed that compliance in this area is low, possibly due to contrivance, but equally possibly due to ignorance of this little understood requirement. Either way, the impact on Treasury in reduced tax yield is estimated to be significant.
In April 2017, new reforms were introduced to the public sector that passed the obligation for assessing each contract from the PSC to the engager, so that where relevant the fee payer became liable for processing PAYE tax and class 1 NICs on the deemed payment. HM Revenue & Customs (HMRC) commissioned a modest research project shortly after introduction of these reforms which suggested they had been a success.
April 2020 was to see further reforms introduced to medium and large organisations within the private and third sector. The coronavirus pandemic, however, scuppered these plans and caused government to postpone the further reforms until April 2021.
During the 2019 general election, every party engaged with the subject of IR35/off-payroll reforms which resulted in the Treasury carrying out a short review of its delivery. A report was published in February 2020, which concluded that:
- • there would be a light-touch approach to penalties arising due to errors in off-payroll during the first year
- • the new rules will not be used by HMRC as a catalyst to open investigations into PSCs for tax years prior to 6 April, unless there is reason to suspect criminal behaviour or further fraud
- • an immediate change which could prove beneficial would be that off-payroll rules will apply to services carried out from 6 April and not to fees paid (even where the services were delivered prior to 6 April), as was the original proposal
- • a legal obligation be placed on the client to declare what size they are, in the event they are asked by the agency or the workers.
By the time the review outcome was published, HMRC had updated guidance that clarified issues which had been raised during the review and in the previous months, including updating the Employment Status Manual. When the postponement was announced, HMRC agreed with the IR35 Forum stakeholders that retaining the draft guidance in this manual, albeit updated to account for the postponement, would be helpful for employers to prepare for the change ahead.
Since then HMRC have also published further products and guidance to help contractors to spot tax avoidance schemes (see https://bit.ly/2XyxJ7E).
HMRC have also committed to commission external research six months after the reforms are delivered.
The requirement for a client to notify their size when requested by an agency or worker, is being introduced to the 2020 Finance Bill through a clause which introduces a new schedule that will amend part 2 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA).
Originally an organisation would be totally excluded and have no obligation to comply with the off-payroll reforms where they didn’t meet the criteria to be medium or large. A corporate entity will be medium or large if it meets at least two of the following criteria for two consecutive years:
- • turnover of more than £10,200,000
- • a balance sheet total (assets) of more than £5,100,000
- • an average of more than fifty employees (see section 382 of the Companies Act 2006).
In the above, ‘balance sheet total’ means the total amounts shown as assets in the company’s balance sheet before deducting any liabilities.
However, significant concerns have continually been expressed about this lack of requirement to communicate size as it would leave the agency or worker not knowing whether an absence of status determinations statement was due to size or a failure to comply. So, the amendment in this year’s Finance Bill is welcome.
A client who is asked this question and who meets the criteria for being small will have 45 days to respond to requests.
PSCs serving small clients will continue to be responsible for assessing contracts under the intermediaries legislation – which is also referred to as ‘Chapter 8, ITEPA’.
Improvements were made to the appearance and language, as well as increased guidance, to help ensure that questions are not misunderstood whilst using the Check Employment Status for Tax (CEST) tool (https://bit.ly/3c7Brdp).
Although feedback, so far, has been mixed but largely positive, the true test of course will come when the reforms are rolled out and decisions tested through tax tribunals.
Possible outcomes from using the CEST tool include:
- off-payroll working rules (IR35) do not apply
- off-payroll working rules (IR35) apply
- unable to make a determination (for whether the off-payroll working rules apply)
- self-employed for tax purposes for this work
- employed for tax purposes for this work
- unable to make a determination (for employed or self-employed for tax purposes).
Concerns remain as to whether users will be able to demonstrate that they have taken reasonable care due to the absence of questions, within CEST, on the subject of mutuality of obligation.
In the event that the CEST tool fails to make a determination, HMRC provide a helpline (tel. 0300 123 2326). It isn’t compulsory to use the CEST tool, as employers are free to engage employment taxes specialists, but they must be able to demonstrate that they have taken reasonable care in reaching a determination (see https://bit.ly/2TMUsvx).
Guidance and education
By the time the reforms were paused, HMRC had delivered in parallel to the above-mentioned review a range of support initiatives and education that in addition to updating the Employment Status Manual also included:
- offering one-to-one support to more than 2,000 of the UK’s biggest employers
- writing directly to 43,000 medium-size businesses and other organisations
- providing large- and medium-size businesses, public bodies, and charities with factsheets (published on GOV.UK) to share with their contractors
- holding eighteen workshops with small tax agents, recruitment agencies, charities, and public bodies
- holding fourteen webinars for small tax agents, recruitment agencies, charities, public bodies, and contractors.
Featured in the July/August 2020 issue of Professional in Payroll, Pensions and Reward. Correct at time of publication.