01 March 2021
John Harling, principal employment taxes consultant at PSTAX, outlines the changes and urges public bodies to prepare
Almost a year since reforms to the off-payroll working (OPW) rules (still often referred to as ‘IR35’) were due to come into effect, the delayed legislation is set to apply from 6 April 2021. Public bodies should be aware of the significant changes involved.
Whilst the main headlines regarding OPW have been about extending the end-client responsibilities to much of the private sector, all sectors – including the public sector – have a new raft of responsibilities that they must adhere to in order to avoid unwanted tax and National Insurance contributions (NICs) liability and penalty charges.
Many public bodies had made preparations in anticipation of the date originally earmarked for the rule changes (April 2020), but it still appears to be the case that not all organisations in the sector are as prepared as they should be. The changes are a specific set of requirements that, unless followed, automatically mean that any NICs and PAYE (pay as you earn) liability lies with the end-client (the public body) until such time that those actions are taken.
As a starting point, public bodies are reminded that OPW specifically refers to the engagement of intermediaries and not individual ‘sole traders’. Whilst there is still an obligation to assess the correct employment of sole traders, the specific OPW rules only apply where the engagement is with another entity, usually a small limited company (personal service company), a partnership, or even through another individual who is not the worker. In the case of personal service companies, the OPW rules must be followed where the worker has a material stake in the company (5% or more). In the case of a partnership, the rules apply where the worker is entitled to 60% or more of a share of the profits or the majority of their income is derived from the end user.
Public bodies are of course already accustomed to many of the OPW rules following major changes introduced in April 2017. However, the latest changes present new obligations that require systems and procedures to be updated imminently. So, what are the main changes and actions required?
...imperative that public bodies should be ready to meet these very specific requirements...
Status determination statement
Firstly, in cases where the OPW rules are deemed to apply (in scope), the legislation requires the end-client to issue what is known as a status determination statement (SDS) to the worker and either the worker’s intermediary (where the intermediary is engaged directly by the public body) or a third party, e.g. an agency (where the contract is between the end client and that party). The law also requires that a SDS be issued in cases where the end-client incorrectly determines that the OPW rules do not apply, as this can provide protection to the end-client should the matter be challenged by HM Revenue & Customs (HMRC). Therefore, whilst the law does not strictly require the SDS to be issued in cases where the end-client has correctly determined that the OPW rules do not apply (out of scope), it is strongly recommended that this be done.
Please note that the SDS must be issued before the contract commences and that the end-client is responsible for deducting and accounting for PAYE/NICs until it has been issued.
In terms of the information required on the SDS, there is no official HMRC form or recommended template. However, the statement must include the following information:
- name of intermediary company
- name of worker
- name of agency (if applicable)
- contract start date
- contract end date
- date SDS completed
- name of person completing the SDS.
The end-client must also provide its reasoning for arriving at the relevant determination, which would at the very least be a copy of the CEST (check employment status for tax) outcome, together with any supporting documentation as required, e.g. advice taken. The SDS should also advise the worker and intermediary/agency that there is a right to disagree with the outcome. This is explained further below.
If there are several parties in the chain, e.g. two or more agencies are involved, the end-client must give the SDS to the agency with which it contracts and that agency then passes it on to the next agency in the chain, and so on. The SDS must also be given directly to the worker in all circumstances. The agency that is responsible for paying the intermediary is the ‘deemed employer’ and must operate PAYE/NICs where it is in scope of the OPW rules. If the end-client contracts directly with the intermediary, it must give the SDS to the worker and the intermediary, and the end-client itself will be the ‘deemed employer’ in these circumstances.
The end-client must keep records of its determination, as this provides an audit trail showing that the matter has been properly considered. Whilst the legislation is not prescriptive in terms of exactly what records should be kept, this should at the very least include the CEST outcome, but also any supporting documentation. This could include any contracts or service agreements in place, supporting correspondence and any advice taken on the matter. Records should be maintained for the longer of the time that the contract is in place and six years.
The disagreement process
The law specifically gives the right for the worker and intermediary/agency to disagree (or appeal) the outcome notified in the SDS. There is no time limit for the appeal to be made and, until such time that any appeal is made, the end-client must proceed on the basis of its original determination as notified in the SDS.
However, should there be a disagreement the end-client must consider this, including any new evidence received, and respond to the worker and intermediary/agency within 45 days of receiving the disagreement. The end-client must advise whether it will stand by the original determination or whether it will change its position. Either way the end-client must again provide its reasoning. Failure to respond within 45 days will result in the end-client being liable to pay the PAYE/NICs due. If the end-client changes its determination from in-scope to out-of-scope of the OPW rules, the determination applies from that time onwards and has no retrospective effect, i.e. there is no obligation on the part of the deemed employer to make any adjustments for the PAYE/NICs deducted prior to the new determination being issued.
...that agency then passes it on to the next agency in the chain, and so on.
Compliance issues and ‘reasonable care’
The legislation gives HMRC the right to recover PAYE/NICs from the end-client if it fails to pass on a SDS and also if it fails to respond to a disagreement from the worker, intermediary or agency. Additionally, the law does allow for PAYE/NICs to be recovered from the next party back upwards in the chain in circumstances where the ‘deemed employer’, e.g. an agency, fails to deduct and account for PAYE/NICs. Please note that this can include the end-client in some circumstances. Whilst HMRC has confirmed that it would not utilise these provisions within the legislation where there was a genuine business failure on the part of an agency, i.e. if it goes out of business, it could utilise them where the end-client has failed to take reasonable care with its processes and the way it deals with OPW generally.
Underpinning the overall approach that public bodies (and others) are expected to take with regard to compliance is the principle of ‘reasonable care’. Where it can be demonstrated that this has applied, it will potentially remove the risk of retrospective tax/NICs and penalty charges arising on the end-client. Whilst the concept is not specifically defined in law, the following steps would all be examples that HMRC would view as taking reasonable care (the list is not exhaustive):
- accurate completion of the CEST
- seeking advice of a qualified advisor
- checking existing determinations to ensure they remain valid and accurate
- reviewing the processes being applied
- making a new determination when there are material changes to engagement.
Taking all of the above into account, public bodies should ensure they are in a position to meet their statutory obligations and take the necessary actions to achieve this. It is vital that the organisation decides how OPW is going to be managed internally so that all stakeholders have a clear understanding of their responsibilities. Ideally, staff who are involved in the process should be adequately trained for this purpose. Public bodies should ensure that all OPW cases are correctly identified, i.e. those involving an intermediary and where personal service is involved. They should liaise closely with any agencies with which an engagement is held so there is a clear understanding and agreement of responsibilities regarding the operation of PAYE.
They will need to make sure appropriate procedures are in place to meet statutory requirements, including SDS completion and submission, record keeping and disagreement processes. This is likely to require internal policies to be updated to incorporate the statutory changes. Whilst the use of the CEST itself is not a statutory obligation, it is recommended that this be used in the first instance, but further advice should be taken where there are any ‘unable to determine’ outcomes or the outcome does not appear to be correct when considered as a whole. Public bodies should always make sure that determinations can be evidenced and routinely revisit these if the engagement continues beyond the original timescale.
To summarise, it is imperative that public bodies should be ready to meet these very specific requirements rather than paying ‘lip service’ to them. Whilst many public bodies are likely to be aware of the changes ahead, they must ensure that they are able to meet all the statutory requirements and demonstrate that reasonable care has been taken at all times.
Featured in the March 2021 issue of Professional in Payroll, Pensions and Reward. Correct at time of publication.