Following a consultation exercise carried out during summer 2018, the government announced at Budget 2018 that, with effect from 6 April 2020, changes would be made to the existing private sector off-payroll working rules (commonly known as IR35) in order to increase compliance and to bring the private sector into line with the public sector which, since April 2017, has been subject to a separate off-payroll regime.
On 5 March 2018, HMRC issued a further policy paper and consultation document aimed at providing private sector engagers and individual workers (together with other parties involved in the labour supply chain) with more certainty regarding how the IR35 rules will work from April 2020 along with details of their respective obligations and responsibilities under the new regime.
The current IR35 regime applies where an individual provides their services through an intermediary (most commonly the individual‘s personal service company (or PSC)) to another person or entity (the client) in circumstances where, had the individual provided their services directly to the client rather than via their PSC, they would have been an employee (or office-holder) of the client.
This basic premise is not changing. What is changing is where the responsibility for determining whether the regime applies, and then subsequently applying it, sits, which the consultation has confirmed will, as a starting point, be based on the off-payroll working rules which apply in the public sector.
As a result, this will mean that, instead of the individual‘s PSC (as is currently the case):
The government has acknowledged that there are a number of areas in which the public sector regime could be improved and has set out various proposals in the consultation document aimed at trying to address at least some of them (and which, if adopted, would then apply to both the new private sector and existing public sector regimes).
Under the public sector regime clients are required to provide a status determination to the party they contract with at the start of the contract and to also provide their reasons for that determination within 31 days of receipt of a written request from that party.
In more complicated supply chains the party the client contracts with is, however, unlikely to be the fee-payer (with the obligation to include the individual on their payroll). In addition, there is no obligation to provide a copy of the determination to the off-payroll worker.
To ensure all parties in the labour supply chain have sufficient information to allow them to comply with their obligations the government therefore intends to include a statutory obligation requiring each party in the supply chain to cascade the client‘s determination, together with the reasons for that determination, to the next party in the chain. In addition, the client will also be required to directly provide the off-payroll worker with their determination and, on request, the reasons for that determination.
What is not clear from the consultation is whether fee-payers who do not contract directly with the client will also have the ability to request the reasons for a determination under this process and, if they can, how the timing and logistics of this would work, particularly in more complicated supply chains. Whilst the consultation does propose an alternative, simplified, approach under which the fee-payer receives the determination (and, where requested, accompanying reasons) direct from the client, this too gives rise to potential logistical issues.
Unhelpfully, the consultation also does not address the potentially unnecessary burden imposed on clients to make a status determination where ultimately the regime does not apply, for example, where they contract with an agency which in turn contracts with the individual worker as an employee or via an umbrella company or where the agency legislation at ITEPA 2003 Part 2 Chapter 7 applies to the engagement. As the obligation to operate PAYE transfers to the client if they fail to pass on a status determination, or if they fail to take reasonable care in arriving at that determination, they are likely to take a cautious approach to all of their off-payroll labour arrangements, resulting in additional administration and potentially wider implications for the flexible labour market.
To encourage compliance with the above extended information requirements the proposed legislation will also provide that, where HMRC does not receive any tax due, liability will initially rest with the party that has failed to fulfill its obligations until such time that they are met. So, for example, if an agency failed to send on a status determination to a fee-payer it, rather than the fee-payer, would be liable for any income tax and national insurance contributions due until such time that it passed on the determination.
More significantly, if HMRC is unable to collect the outstanding liability from that party, for whatever reason, it is proposed that the liability would then transfer back to the first party or agency in the chain (by-passing any intermediate parties in the chain) and if recovery was still not obtained, liability would then transfer back to the client.
HMRC‘s justification for this approach is to provide a clear incentive for all parties to comply with their respective obligations and to encourage parties to contract with reputable and compliant firms.
To ensure clients give due consideration to the facts of a particular engagement and to alleviate potential concerns around the making of blanket status determinations it is also proposed that clients will be required to put in place a process for resolving disagreements relating to status determinations.
The ultimate design and operation of this would be for each client to determine, to fit in with their wider business processes but, as a minimum, would require the client to give consideration to any evidence put forward by an individual worker and/or fee-payer and to advise that party of the outcome of that consideration and the reasons for it.
No, the proposed changes will not apply to small organisations.
Whether or not a client is small will be determined, for corporate clients, in line with the definition contained at s 382 of the Companies Act 2006. This requires satisfaction of two or more of the following requirements in a financial year:
If a corporate client does not qualify as small under this test, or under the test for small groups in the Companies Act 2006 s 383 (or is excluded from qualifying despite meeting the requirements under either test as a result of the application of the Companies Act 2006 s 384) it will be subject to the new IR35 regime.
For non-corporate clients, two alternative tests have been proposed, both of which exclude the balance sheet requirement. Under the first option the client would not be considered small (and therefore would be subject to the new IR35 regime) if it had 50 or more employees, or if it had turnover in excess of £10.2m. Under the second option it would not be considered small if it had both 50 or more employees and turnover in excess of £10.2m. Whilst removal of the balance sheet requirement is understandable, as it may not be suitable for all non-corporate clients, it is not clear why a different employee requirement is being proposed than applies for corporate clients under the Companies Act tests.
When an organisation ceases to be (or becomes) small for an accounting period, the new regime will apply (or cease to apply, as the case may be) from the start of the tax year following the end of that accounting period.
If a client is small the existing IR35 regime will continue apply to the engagement, with the individual‘s PSC retaining responsibility for determining whether the regime applies and, if it does, subsequently applying it.
HMRC launched the ‘check employment status for tax’ (CEST) service in 2017 to help clients determine the status of their off-payroll workers. Responding to concerns raised regarding the CEST‘s ability to provide accurate status determinations HMRC is currently working with stakeholders to enhance the service and to improve its accompanying guidance.
In addition, HMRC is developing an education and support package intended to provide each party in the labour supply chain with the information and guidance they require to apply the off-payroll working rules. It is intended that this will be made available to affected parties, so they can ‘act on the changes in time for April 2020’.
The consultation closes on 28 May 2019 with draft legislation expected in Summer 2019.
Given the potentially significant impact of these reforms it is important that organisations take advantage of the time available prior to 6 April 2020 to fully prepare for their introduction.
As a starting point this will include the identification and review of existing off-payroll engagements to determine which are likely to fall within the scope of the reforms. This in turn will allow consideration of the potential financial implications (such as additional employer national insurance and apprenticeship levy liabilities).
A review of contractual terms will also be required to ensure responsibility for potential liabilities is addressed and appropriate protections are included. Where relevant wider reviews of labour supply chains may also be required, particularly where there is the possibility for unpaid liabilities to be transferred back down the supply chain.
Internal systems and processes will also need to be reviewed to ensure they are set up and ready to deal with the reforms. This could include procurement and on-boarding policies, payroll (including payroll software) and HR. In particular, appropriate systems will need to be in place to ensure that status is considered and decisions made on a consistent basis, relevant information is cascaded and acted on within appropriate time frames and processes are in place for dealing with potential disputes.
Following a consultation exercise carried out during summer 2018, the government announced at Budget 2018 that, with effect from 6 April 2020, changes would be made to the existing private sector off-payroll working rules (commonly known as IR35) in order to increase compliance and to bring the private sector into line with the public sector which, since April 2017, has been subject to a separate off-payroll regime.
On 5 March 2018, HMRC issued a further policy paper and consultation document aimed at providing private sector engagers and individual workers (together with other parties involved in the labour supply chain) with more certainty regarding how the IR35 rules will work from April 2020 along with details of their respective obligations and responsibilities under the new regime.
The current IR35 regime applies where an individual provides their services through an intermediary (most commonly the individual‘s personal service company (or PSC)) to another person or entity (the client) in circumstances where, had the individual provided their services directly to the client rather than via their PSC, they would have been an employee (or office-holder) of the client.
This basic premise is not changing. What is changing is where the responsibility for determining whether the regime applies, and then subsequently applying it, sits, which the consultation has confirmed will, as a starting point, be based on the off-payroll working rules which apply in the public sector.
As a result, this will mean that, instead of the individual‘s PSC (as is currently the case):
The government has acknowledged that there are a number of areas in which the public sector regime could be improved and has set out various proposals in the consultation document aimed at trying to address at least some of them (and which, if adopted, would then apply to both the new private sector and existing public sector regimes).
Under the public sector regime clients are required to provide a status determination to the party they contract with at the start of the contract and to also provide their reasons for that determination within 31 days of receipt of a written request from that party.
In more complicated supply chains the party the client contracts with is, however, unlikely to be the fee-payer (with the obligation to include the individual on their payroll). In addition, there is no obligation to provide a copy of the determination to the off-payroll worker.
To ensure all parties in the labour supply chain have sufficient information to allow them to comply with their obligations the government therefore intends to include a statutory obligation requiring each party in the supply chain to cascade the client‘s determination, together with the reasons for that determination, to the next party in the chain. In addition, the client will also be required to directly provide the off-payroll worker with their determination and, on request, the reasons for that determination.
What is not clear from the consultation is whether fee-payers who do not contract directly with the client will also have the ability to request the reasons for a determination under this process and, if they can, how the timing and logistics of this would work, particularly in more complicated supply chains. Whilst the consultation does propose an alternative, simplified, approach under which the fee-payer receives the determination (and, where requested, accompanying reasons) direct from the client, this too gives rise to potential logistical issues.
Unhelpfully, the consultation also does not address the potentially unnecessary burden imposed on clients to make a status determination where ultimately the regime does not apply, for example, where they contract with an agency which in turn contracts with the individual worker as an employee or via an umbrella company or where the agency legislation at ITEPA 2003 Part 2 Chapter 7 applies to the engagement. As the obligation to operate PAYE transfers to the client if they fail to pass on a status determination, or if they fail to take reasonable care in arriving at that determination, they are likely to take a cautious approach to all of their off-payroll labour arrangements, resulting in additional administration and potentially wider implications for the flexible labour market.
To encourage compliance with the above extended information requirements the proposed legislation will also provide that, where HMRC does not receive any tax due, liability will initially rest with the party that has failed to fulfill its obligations until such time that they are met. So, for example, if an agency failed to send on a status determination to a fee-payer it, rather than the fee-payer, would be liable for any income tax and national insurance contributions due until such time that it passed on the determination.
More significantly, if HMRC is unable to collect the outstanding liability from that party, for whatever reason, it is proposed that the liability would then transfer back to the first party or agency in the chain (by-passing any intermediate parties in the chain) and if recovery was still not obtained, liability would then transfer back to the client.
HMRC‘s justification for this approach is to provide a clear incentive for all parties to comply with their respective obligations and to encourage parties to contract with reputable and compliant firms.
To ensure clients give due consideration to the facts of a particular engagement and to alleviate potential concerns around the making of blanket status determinations it is also proposed that clients will be required to put in place a process for resolving disagreements relating to status determinations.
The ultimate design and operation of this would be for each client to determine, to fit in with their wider business processes but, as a minimum, would require the client to give consideration to any evidence put forward by an individual worker and/or fee-payer and to advise that party of the outcome of that consideration and the reasons for it.
No, the proposed changes will not apply to small organisations.
Whether or not a client is small will be determined, for corporate clients, in line with the definition contained at s 382 of the Companies Act 2006. This requires satisfaction of two or more of the following requirements in a financial year:
If a corporate client does not qualify as small under this test, or under the test for small groups in the Companies Act 2006 s 383 (or is excluded from qualifying despite meeting the requirements under either test as a result of the application of the Companies Act 2006 s 384) it will be subject to the new IR35 regime.
For non-corporate clients, two alternative tests have been proposed, both of which exclude the balance sheet requirement. Under the first option the client would not be considered small (and therefore would be subject to the new IR35 regime) if it had 50 or more employees, or if it had turnover in excess of £10.2m. Under the second option it would not be considered small if it had both 50 or more employees and turnover in excess of £10.2m. Whilst removal of the balance sheet requirement is understandable, as it may not be suitable for all non-corporate clients, it is not clear why a different employee requirement is being proposed than applies for corporate clients under the Companies Act tests.
When an organisation ceases to be (or becomes) small for an accounting period, the new regime will apply (or cease to apply, as the case may be) from the start of the tax year following the end of that accounting period.
If a client is small the existing IR35 regime will continue apply to the engagement, with the individual‘s PSC retaining responsibility for determining whether the regime applies and, if it does, subsequently applying it.
HMRC launched the ‘check employment status for tax’ (CEST) service in 2017 to help clients determine the status of their off-payroll workers. Responding to concerns raised regarding the CEST‘s ability to provide accurate status determinations HMRC is currently working with stakeholders to enhance the service and to improve its accompanying guidance.
In addition, HMRC is developing an education and support package intended to provide each party in the labour supply chain with the information and guidance they require to apply the off-payroll working rules. It is intended that this will be made available to affected parties, so they can ‘act on the changes in time for April 2020’.
The consultation closes on 28 May 2019 with draft legislation expected in Summer 2019.
Given the potentially significant impact of these reforms it is important that organisations take advantage of the time available prior to 6 April 2020 to fully prepare for their introduction.
As a starting point this will include the identification and review of existing off-payroll engagements to determine which are likely to fall within the scope of the reforms. This in turn will allow consideration of the potential financial implications (such as additional employer national insurance and apprenticeship levy liabilities).
A review of contractual terms will also be required to ensure responsibility for potential liabilities is addressed and appropriate protections are included. Where relevant wider reviews of labour supply chains may also be required, particularly where there is the possibility for unpaid liabilities to be transferred back down the supply chain.
Internal systems and processes will also need to be reviewed to ensure they are set up and ready to deal with the reforms. This could include procurement and on-boarding policies, payroll (including payroll software) and HR. In particular, appropriate systems will need to be in place to ensure that status is considered and decisions made on a consistent basis, relevant information is cascaded and acted on within appropriate time frames and processes are in place for dealing with potential disputes.
