UK: Midlands Businesses Facing Potential Tax Change Double Whammy

Last Updated: 12 August 2015
Article by Harvey Smith

Most Read Contributor in UK, August 2017

At the end of last month the government published two consultation documents: One relating to the engagement of workers via off-payroll arrangements known as "personal service companies" (PSCs), and; one on the tax and NIC treatment of termination payments.

Engaging workers off-payroll

The reality is that many Midlands businesses engage individual workers via PSCs. Commercial reasons for businesses engaging individual workers via PSCs include; covering a short-term or specific business need or because the individual wishes to take advantage of the benefits of incorporation and neither want to establish an employee-employer relationship. Under current rules, it is usually the responsibility of the PSC to account for income tax and National Insurance, via what are known as "IR35" requirements.

However, one of the options under consideration would make the engager responsible for deciding whether a worker should be subject to income tax and National Insurance deductions. If so, assuming this option is implemented, the engager would also be required to make deductions.

This would represent a significant change for many Midlands businesses. There would be a requirement to review all engagements via PSCs and consider the impact from both an engagement, taxation and overall cost perspective.

There would be little incentive for workers to abandon their PSCs since the risk of incorrectly assessing their tax position would be borne by the engager. Meanwhile, engagers are stuck between a rock and a hard place: if they engage workers directly they would be exposed to potential employment status risks; while engaging with PSCs will expose them to a new IR35 risk if the proposals are adopted.

Termination payment reforms

The current tax and NIC rules on termination payments can be difficult to apply, due to their complexity. Many employers struggle to draw a distinction between payments that are subject to full income tax and National Insurance and those subject to a £30,000 tax exemption and free of National Insurance.

The government consultation proposes a number of measures to reform these rules, including aligning the tax and NIC treatment and only providing relief where the payment arises in circumstances equivalent to redundancy. Under this new proposal, the value of the exempt relief would effectively amount to a tax free allowance which could be applied across all types of payment made in connection with termination, without worrying if they would otherwise be taxable or tax free.  It would increase in proportion to the employee's years of service, but would be likely to be less than £30,000 overall. The current tax treatment of injury/disability, foreign-service and unfair/wrongful dismissal payments are also under review to determine whether any special treatment should apply.

If implemented, the government's proposals would fundamentally change the tax rules, which a business needs to consider when an employee exits. For example, under the new exemption proposal, there could be an additional employer National Insurance cost where the business delivers an exit payment that is not ordinary earnings but does not involve redundancy, or any payment that exceeds the new exemption threshold. Responses to the consultation are requested by HMRC by 16th October 2015. 

Further changes

These potential changes come at a time when other important new tax responsibilities need to be considered by employers: 

  1. The process for agreeing tax free expenses with HMRC changes as of 6th April 2016 via an end to P11D dispensations, which are agreements with HMRC removing the need to report employee expenses in certain circumstances. These will be replaced by a system of self-assessment and a requirement to agree (or re-agree) bespoke arrangements with HMRC. Where businesses wish to reimburse expenses through an allowance, they will need to substantiate any bespoke rate they would like to use, or use an HMRC approved rate, if HMRC provides one for the particular expense concerned. In either case businesses will need new processes to conduct regular checks that employees are actually incurring expenditure in order for the allowance to qualify for tax free status. We recommend that all businesses carry out an early assessment of their current approach to expenses treatment, as waiting until the 6th April 2016 change may result in reporting and taxation errors;
  2. The first quarterly intermediaries report was due to HMRC on 5th August 2015.  This impacts Midlands businesses where the worker is considered to be 'personally providing services' to an end user customer. Only the supply of a business's own employees and intra-group supplies of workers are excluded. There is some relaxation of financial data where workers are reported through Real Time Information by someone within the supply chain, but personal details must still be reported in these circumstances. These changes will impact a range of Midlands-based industries, for example; employment agencies, construction, catering and IT sectors.

However a quarterly return is not required where the service contract with the customer involves more than the supply of labour (i.e. something more than the worker 'personally providing services'). This is a complex area within the new rules and a careful analysis of all current and pending contract types is advisable. Where the worker is sourced from overseas this adds another layer of complexity and further advice should be sought.

Any business involved in the supply of workers who may be 'personally providing services' to a customer other than own employee and intra-group situations and that is not already geared up to submit their report should take immediate action to review their positon. This is especially the case as the information and data gathering process is potentially onerous, involving the need to obtain personal information relevant to each worker. There are penalties in the event of reporting failures.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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