UK: IR35: Off Pay-Roll Working In The Private Sector – Are You Ready?

Last Updated: 6 March 2019
Article by Chris Holme and Ruth Bonino

Most Read Contributor in UK, March 2019

As announced in the 2018 Budget, the public sector off-payroll working rules will be extended to the private sector from 6 April 2020, after a public consultation due to take place this year. The rules will only apply to large and medium-sized businesses, with only the existing IR35 rules continuing to be relevant in relation to small businesses.

In relation to what a large and medium size business is – it appears that the Government will say it is any business which is not a small business – with a small business being as defined in the Companies Act 2006 (i.e one that satisfies at least two of the following requirements: turnover of not more than £10.2 million; balance sheet of not more than £5.1 million; and no more than 50 employees). Note that this is yet to be confirmed.

The draft legislation is expected in summer this year so we don't yet have the precise details on what the new rules will look like. However, many businesses are already thinking about the consequences of the proposed changes. For that reason, it's worth taking a closer look at how the public sector rules work currently. The key issues which private sector businesses will want to think about are –

  • Their new obligations to determine employment status of their contract/agency staff
  • When the liability to deduct PAYE and NICs arises in respect of those staff.

A short introduction to IR35

Many self-employed contractors use personal service companies (PSCs) to supply their services to their clients. This is a way of saving tax and NICs which is why HMRC introduced IR35 as a way of combatting the risk that PSCs and other intermediaries posed to the tax base. In essence this asks whether, but for the interposing PSC, the individual would have been regarded as an employee of the client organisation engaging them. This involves considering the nature of the work performed under the contract and the terms under which it is performed and is known as "deemed employment". If the answer to this is yes, then the PSC has to account to HMRC for income tax and NICs on the payments received from the client.

How the off-payroll rules work in the public sector

As IR35 has not been as successful as it ought to have been, from 6 April 2017 the government introduced new rules in the public sector, which effectively shifted the responsibility for accounting for income tax and NICs from the intermediary PSC to the person directly paying the PSC (known as "the Fee Payer"). The Fee Payer will therefore be either the public sector employer engaging the services ("the Employer"), or the recruiting agency/other specialist service provider ("the Agency") if one is engaged.

Where these new "off-payroll working rules" apply, payments received by a PSC, directly or indirectly from a contract with an Employer, will fall outside the IR35 rules. In addition, the responsibility for determining deemed employment also shifts from the intermediary PSC to the Employer engaging the contractor. If a contractor is considered to be in deemed employment, the Employer, or Agency (depending on who directly pays the PSC) must make payroll deductions for tax and NICs (through PAYE).

Four key questions the Employer must ask itself in respect of each contractor:

  1. Will the off-pay roll rules apply at all? The rules do not affect contractors supplied by an employment agency or umbrella company, where they directly employ them and operate tax and NICs on earnings they pay them, or staff supplied though a managed service company that operates PAYE on the payments.
  2. Where the rules do apply in principle, is the contractor using an intermediary which meets the relevant conditions for the new rules to apply? An "intermediary" would be a company (ie commonly known as a Personal Service Company – PSC) in which the contractor has a material interest (ie holds more than 5% of shares), but could include certain partnerships which the contractor is a member or even an individual.
  3. If the contractor is using a relevant intermediary (eg a PSC), is there a "deemed employment"? This will be for the Employer to determine and to inform the relevant parties as mentioned above.
  4. Where there is a deemed employment, who pays the PSC? In a chain of intermediaries between the Employer and the contractor's intermediary (or PSC), it is the lowest UK based intermediary in the chain (that is, the one that pays the PSC) that must operate PAYE.

Practical implications of the off-payroll working rules

  • Determining deemed employment is not always clear cut and it is often necessary to seek legal advice. Although there is no obligation to use the government's new online tool (the CEST) for this purpose, the advantage of doing so is that HMRC will be bound by the output of the service, unless it has been obtained fraudulently.
  • Informing the Agency/PSC about the determination of deemed employment. Having determined employment status, the Employer must inform both the PSC/contractor and, if applicable, the Agency which pays the PSC, of the outcome of the review and, if requested, provide a written response as to how the conclusion on employment status was reached. The Employer must have a clear process in place to comply with this information requirement.
  • Extra costs. A key consequence of the new rules is that Fee Payer is responsible for an additional cost of 13.8% employer NICs and, if applicable, 0.5% apprenticeship levy on top of the payment. Broadly, the levy is 0.5% of pay bills over £3 million in the relevant tax year. The Fee Payer is not entitled to deduct these costs from the fee payable to the PSC. The contractor, on the other hand, is likely to be in a better position (although this depends on the circumstances) as the PSC no longer has to account for PAYE and NICs on the fee received from the Agency. For a contractor who formerly considered themselves to be self-employed and that IR35 did not apply, deduction of payroll taxes will result in a significant reduction in profit for the PSC that would otherwise have been available to draw as dividends.
  • Pressure to re-negotiate contracts between the Employer, the Fee Payer and the PSC – due to these extra costs, it is likely that the Fee Payer will wish to re-consider the contractual terms -
    • Where possible the Fee Payer may wish to re-negotiate its fee with the PSC/contractor to take account of the transfer of NIC liability to the Fee Payer.
    • The Fee Payer may try to recover the extra cost of the apprenticeship levy (if applicable). The levy is payable by companies liable for employer's NICs and is calculated on the size of the pay bill. It's possible that the levy may be a new cost for very large agencies who become Fee Payers under the new rules.
    • The Fee Payer may consider getting the contractor to abandon their PSC and supply their services instead through an umbrella company or on a fixed term employment contract.
  • The PSC/intermediary will remain the employer for the purpose of paying benefits such as statutory sick pay and statutory maternity, paternity or shared parental pay.

What are the consequences for the Employer for not getting it right?

Even where the Employer is not the Fee Payer (and therefore not normally liable to account for PAYE and NICs of the relevant contractor) liability could fall to the Employer in certain circumstances, including if it -

  • fails to notify its decision about deemed employment to the contractor/PSC or Agency with whom it has a contract to provide the services, within the timescale;
  • fails to reply to the written request from the contractor/PSC or Agency for the reasons for the decision within 31 days of receiving it; or
  • fails to exercise reasonable care in providing its view as regards employment status.

In the context of the private sector, the government has said it will explore options for the consequences of businesses failing to use reasonable care in making their decisions.

What's next?

Private sector companies should familiarise themselves with the public sector rules and start thinking about how the rules will apply to them. In particular, companies should:

  • conduct an audit of contractors used in their organisation;
  • liaise with agencies and specialist service providers to determine which contractors may potentially be caught by the new rules; and
  • estimate any likely cost increases due to employer NICs and Apprenticeship Levy charges and any potential changes in contractor charges.

Finally, look out for the government's public consultation on the new private sector rules, expected by summer 2019. Also look out for improvements to HMRC's online tool, CEST, which are expected to be in place before April 2020, along with updated HMRC guidance to the private sector.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions