01 December 2020

HMRC sets out how to prepare for the imminent changes

From 6 April 2021, the way contractors pay tax may change. Many organisations and contractors are already preparing for this change.

The off-payroll working rules, commonly known as ‘IR35’, are changing for medium- and large-sized non-public sector organisations that engage contractors through their own limited company or other intermediary. The rules ensure that people working like employees, but through their own limited company or other intermediary, pay broadly the same income tax and National Insurance contributions (NICs) as regular employees.

To help contractors and organisations deal with the impacts of the Covid-19 pandemic the government delayed introduction of the changes from 6 April 2020 until 6 April 2021.

What are the changes?
This is not a new tax. From 6 April 2021, medium- and large-sized organisations outside of the public sector will become responsible for deciding the employment status for tax purposes of contractors. Currently, the contractor’s own limited company, or other intermediary, is responsible for making this decision if they are providing services for organisations outside the public sector.

This brings the private sector into line with the public sector, where these rules changed in 2017. There are also additional changes to the public sector from April 2021, which public sector organisations should familiarise themselves with.

Contractors providing their services to small non-public sector organisations will continue being responsible for deciding whether the off-payroll working rules apply.

What do organisations need to do?
Organisations and contractors should prepare for these changes now. You will need to prepare if you are:

  • a medium- and large-sized non-public sector organisation which engages contractors who work through their own limited company or other intermediary
  • an employment agency which supplies contractors who work through their own limited company or other intermediary
  • a public authority – there are additional changes from April 2021
  • a contractor providing services through your own limited company or other intermediary.

HMRC is providing information and support now to ensure organisations and contractors are prepared for the changes in April 2021.

Organisations should review their contractor arrangements and talk to their contractors about whether the off-payroll working rules will apply to them from April. HMRC’s check employment status for tax (CEST) tool (http://bit.ly/2VF2ZTl) is a free online tool which can be used to find out if a contract is inside the rules and the contractor should be treated as an employee for tax purposes.

If the rules apply, organisations will need to provide contractors with a status determination statement (SDS), setting out and explaining their decision. If they contract with an agency rather than directly with the contractor’s limited company, they will also need to pass this SDS onto the agency. Organisations will also need to put in place a status disagreement process to handle any disputes that may arise from any of the determinations they provide to contractors.

If a contractor is determined as inside the rules then the organisation, or the agency that pays the contractor, will need to set the contractor up on payroll and deduct income tax and NICs before paying the contractor.

Extra help
HM Revenue & Customs (HMRC) has launched its programme of support for customers, and as part of this a series of webinars are running from October 2020 to April 2021. There are webinars for organisations and contractors setting out an overview of the rules.

HMRC is also delivering a series of webinars on specific topics providing detailed support on key areas where customers may need additional education, including a webinar on fee-payer responsibilities to help clients and employment agencies who may need to put contractors on their payroll as part of the changes.

Support for contractors
Organisations should talk to their contractors, to help them understand what the changes might mean for them.

As well as webinars, HMRC has updated its information resources to help contractors understand what the reforms mean for them and what the changes will be from April. These include a factsheet setting out the changes, and a flowchart to help contractors identify whether they are likely to be affected by the rules. Client organisations and employment agencies can share these with the contractors they engage to help them get ready for the changes.

HMRC has also published a guide on tax avoidance schemes aimed at contractors and agency workers (https://bit.ly/3nk9JQZ). Contractors should always think carefully before signing up to schemes, to ensure they don’t involve tax avoidance. They may be tempted by arrangements that are described as a way of taking home a larger portion of their income or to simplify their tax affairs but are in reality tax avoidance schemes. If something looks too good to be true, it probably is.

Featured in the December 2020 - January 2021 issue of Professional in Payroll, Pensions and Reward. Correct at time of publication.