Off-payroll working rules

01 September 2019

This article was featured in the September 2019 issue of the magazine. 

Samantha Mann MAAT MCIPPDip, CIPP senior policy and research officer, outlines the changes

Legislation came into force in April 2000 that sought to collect pay as you earn (PAYE) income tax and class 1 National Insurance contributions (NICs) from fees paid to individuals who were providing personal services to a client but working through an intermediary. An intermediary can take different forms – for example, a partnership, an individual or a managed service company – but the most popular choice is a personal service company (PSC) which has a separate legal identity to the individual. Instead of payments going directly from the client to the worker, they are instead paid to the PSC – or other intermediary.

From 6 April 2000, an obligation was placed on the PSC to decide whether the contract between the individual and the client would have been one of employment had the intermediary not existed and, if so, calculate an amount of PAYE income tax and class 1 NICs on the payment, as if the payment had been salary. Referred to as ‘IR35’ – which was the press release reference at the time – it is safe to say it has not been a popular, nor widely understood policy.

On the back of claims by HM Revenue & Customs (HMRC) that there was widespread non-compliance, and subsequent to consultation, off-payroll working rules were introduced for the public sector. These rules transferred the responsibility for assessing and determining whether the contract would – but for the intermediary – be one of employment, to the public sector engager i.e. the client. If the client also happened to be the direct fee-payer, it became responsible for calculating PAYE income tax together with class 1 NICs (primary and secondary). Where the fee-payer was separate from the engager (i.e. an agency) the client became responsible for ensuring that the status determination made was provided to the fee-payer.  

HMRC received much criticism for the short notice given to enable the public sector to prepare for off-payroll working rules.

It was announced in Budget 2018 that, as expected, off-payroll working would be extended to the private sector from April 2020. Key features from this announcement include:

  • small engagers would be excluded

  • the status tool CEST (see below) was to be reviewed 

  • further consultation would be carried out

  • guidance would be improved, and 

  • the ‘private sector’ could be defined as any sector not previously captured by the public sector reforms of 2017.

The off-payroll reforms are not intended to impact the genuinely self-employed.

 

CEST

Following recommendations made by the Office of Tax Simplification and in support of the off-payroll working rules being delivered to the public sector, a new online service was designed to replace the former employment status indicator (ESI) tool to support the client, the fee-payer and the worker in making a status determination for the purpose of tax (as opposed to employment rights).

Unlike the ESI tool, the check employment status for tax (CEST) service provides a print-out of the outcome. HMRC has stated it will stand by the result given unless a compliance check finds the information provided is inaccurate.

The CEST service continues to receive much criticism and has been ruled against in a small number of first-tier tax tribunal cases.

Before using CEST, HMRC makes clear that you will need to know: the worker’s responsibilities; who decides what work needs doing; who decides when, where and how the work’s done; how the worker will be paid; whether the engagement includes any benefits or reimbursement for expense.

 

Reforms

In response to the outcomes of an initial consultation in 2018 a further consultation ran closing in May 2019. The outcome, published in July, confirms reforms to the current off-payroll working rules.

Off-payroll working rules will apply to all private and third sector engagers with the exception of those defined as ‘small’ by provisions in the Companies Act 2006. For this purpose, three qualifying conditions must be met:

  • annual turnover must not be more than £10,200,000

  • balance sheet total must not be more than £5,100,000

  • number of employees must not be more than fifty.

Note that the amendments to off-payroll working rules will also impact the public sector but with the exception that no public sector engager will be considered small.

A small company will cease to be ‘small’ if it fails to meet the conditions for two consecutive years. The same measure is used conversely if a company shrinks in size. 

Unincorporated clients, however, will not benefit from this two-year provision; they will only have one condition to meet, which is that their turnover exceeds £10,200,000. The rules will begin to apply in the tax year following the calendar year in which the threshold is exceeded. Depending upon when its financial year ends, a small organisation approaching or predicting that its turnover will exceed £10,200,000 will need to be prepared to adapt processes to meet additional obligations.

An engaging client that is small will not be mandated to notify the supply chain or the worker that they are ‘small’ and therefore not within the reforms. Procedures will need to be strengthened to ensure the agency and the worker can establish this information through their usual ‘getting to know your client’ processes. 

 

Flow of information

The client is responsible for passing the determination, together with the reasons for making that determination, to the fee-payer (where they are not one and the same) and also directly to the worker. The aim is to improve transparency for the fee-payer as well as the worker.

Responses to the latest consultation suggested that, in general, supply chains are short and consist of an average of four parties which includes the engaging client and the worker’s PSC. In a supply chain the client would only be responsible for passing the status determination to the party that they contract with, in addition to the worker. 

 

Non-compliance in supply chains

The reforms require the client to make the status determination to establish whether the worker falls within scope (i.e. would they be an employee if they were not working through an intermediary). However, once made, it is for the fee-payer to calculate PAYE income tax deductions and class 1 primary and secondary NICs where the worker is ‘deemed’ to be an employee.

Quite often the engager and the fee-payer are the same; however, where they are not, and where there is a lengthy supply chain, there is an increased risk that the failure to comply will occur either because one party in the chain fails to pass on the status determination or fails to act on it resulting in an unpaid tax liability.

HMRC believes that the client and the first agency are in the best position to improve compliance in the labour supply chain. Where failure to comply occurs by the fee-payer in a supply chain, in the first instance HMRC will take steps to collect the unpaid liability from the non-compliant entity. Where this is not possible HMRC will look initially to the first agency in the supply chain and then to the engaging client.

 

Disagreement process

HMRC consulted on the proposal of mandating a client-led status disagreement process where both the worker and the fee-payer would have the right to request and receive a response if they believe the status determination to be incorrect. The client will have 45 days in which to respond starting from the date the request is lodged.

Legislation aims to set minimum requirements of the process, the objective being to ensure the same process will be followed by all clients. HMRC aims to set out in guidance how a client can fulfil their obligations to take reasonable care and how best to implement the status disagreement process. 

In addition to CEST, HMRC also provide a specialist helpline when considering status and engagers are already required to take reasonable care in making their decisions.

 

A long summer ahead?

HMRC received significant criticism for the short notice it provided to public sector engagers to enable them to prepare for the 2017 reforms and it would appear that little has been learned as we hurtle towards April 2020. It is disappointing that HMRC couldn’t allow a more reasonable period of time before obligations in the private sector are to begin.

Draft clauses to the Finance Bill were published for technical consultation on 11 July with the assurance of guidance being made available by the end of summer – a season that we know government can extend as far as October. I hope that as you are reading this article news will also be published through our daily News Online that guidance is now up to date – or at least more usefully up to date than the version we currently have access to.

From a payroll processing perspective, it would be good to see within the real time information data items list the provision of a flag so as to ensure that ‘deemed employees’ captured by off-payroll working are not counted as employees by HMRC.

 

HMRC guidance

Early guidance by HMRC prompts engagers to prepare now, and advises the following:

  • Know your current workforce – do you have individuals supplying services via intermediaries?

  • Determine if the off-payroll rules apply for any contracts that will extend beyond April 2020. CEST can be used but so can external professional services – consider which might be better for your set up.

  • Open communication lines with your contractors to establish whether the off-payroll rules apply to their role.

  • Establish processes to ensure you capture whether off-payroll rules apply to future engagements starting with who will make the determinations and what information will they need.