What are the off-payroll working rules?
HMRC introduced the off-payroll working rules - also known as IR35 - in 2000 to tackle what it referred to as "disguised employment". What it meant by that was circumstances where some contractors provided their services via an intermediary - often a Personal Service Company ("PSC") - in order to avoid being classed as an employee for tax purposes. This provided greater tax efficiency to the contractor and meant the organisation hiring the contractor (the "client") did not have to pay employers' national insurance contributions (NICs) or give contractors employee benefits.
When IR35 was first implemented it fell to the contractor to assess their own status for tax purposes. This was changed in the public sector in 2017. The changes meant that when IR35 applied the client was responsible for working out the employment status of the person providing their services. This meant assessing whether a contractor is genuinely self-employed or whether, in reality, they would be deemed to be employed. The third category of employment status that is relevant when assessing employment rights - that of a worker - is not relevant for tax purposes. HMRC says the rules apply if a contractor "would be an employee if there was no intermediary".
What is changing?
Since 2017, the changes to the rules have only applied to payments made by or on behalf of public authorities to intermediaries. In the private sector responsibility for assessing status remained with the contractor. However, the 2018 Autumn Budget confirmed the change to the rules would be extended to private sector companies with effect from April 2020. The coronavirus pandemic caused implementation to be delayed to 6 April 2021.
Small private sector companies are exempt from these changes, and where the client is overseas and has no UK connection the new rules will also not apply. To qualify as a "small company" the client must meet two of the following criteria:-
- Have an annual turnover of no more than £10.2million;
- Have a balance sheet total of no more than £5.1 million;
- Have no more than 50 employees.
The new rules introduce the concept of a 'fee-payer', who will be required to operate PAYE in the event that the client determines IR35 applies. In circumstances where the client contracts directly with the PSC, the client and the fee-payer will be one and the same. However, in practice it is quite common for PSCs to be contracted through an agency. In that case, the obligation to determine status will remain with the client, but the agency will be the fee-payer.
What does this change mean for clients engaging contractors?
From 6 April onwards clients in the private sector who are not exempt will have to:-
- Determine the contractors status for tax;
- Notify the contractor of the determination and the reasons for it - where an agency is involved the agency must also be notified;
- If IR35 applies then the fee-payer must make the appropriate income tax and NIC deductions and account for them (and employer NIC) to HMRC.
Clients must also put in place a process under which contractors and/or fee-payer agencies can challenge the status determinations. Any challenges must be responded to within 45 days. The Finance Act 2020 also introduced a right to request confirmation of the client's size so a contractor or fee-payer agency can assess whether the client might be exempt. Again the client must respond to any such request within 45 days.
Even in cases where an agency is the fee-payer, clients should be aware that where HMRC cannot recover payments from the agency they (the client) will have ultimate liability for accounting for tax and NIC.
Is it easy to assess when the rules apply?
No. The legislation implementing IR35 is complicated. This combined with the ambiguity over employment status guidelines mean that identifying which contractors fall within the rules and which do not will not always be straight forward. HMRC's own record on fighting IR35 cases in tribunals has had mixed success, so even it doesn't always get it right. HMRC created a tool for checking employment status - CEST - following the introduction of the rules in the public sector, however its accuracy has been criticised. This is understandable given that tribunals have struggled with the complexity of assessing status for years. Despite that, HMRC have confirmed they will stand by whatever result CEST comes to.
What can medium and large private sector businesses do to prepare?
Businesses who have not yet started planning for the new rules should do so immediately. Key steps will be:-
- Auditing current arrangements with contractors to identify who is operating via an intermediary. Where an agency is involved that will mean seeking information from them as to whether PAYE is already in operation;
- Deciding how status will be determined and what information is required to do that. That is likely to mean obtaining detailed information from contractors, PSCs and/or agencies;
- Putting in place procedures to (i) communicate the outcome of the determination and to handle any challenges and (ii) to respond to requests regarding size, both within the requisite 45 day timescale.
Businesses may also want to consider a wider review of the terms of their commercial contracts with intermediaries and agencies. Do they contain obligations to provide information (required for the determination) timeously? Where agency fee-payers are involved is there a remedy available against them should the client become liable for their failure to properly operate PAYE? In some cases it may be beneficial to consider changing the working arrangements with the contractor to one of worker or employee - in some cases it may become clear from the audit that in reality that is the correct categorisation of the relationship between the parties.
