UK: Consulting On Reforming The Off-Payroll Working Rules

Last Updated: 29 March 2019
Article by Stefan Martin and Ed Bowyer

HMRC has issued a consultation on implementation of reforms to the off-payroll working rules, which will be extended to the private sector from April 2020.  The consultation provides useful detail on the intended scope of the reforms – which will impact both private and public sector organisations – and is intended to help businesses start preparing for reform.  Draft legislation will be published this summer.

The off-payroll working rules are intended to ensure that individuals who work like employees pay broadly the same employment taxes as employees, regardless of the structure they work through.   The rules will apply where an individual (known the "worker") provides services through an intermediary (such as a personal services company) to another person or entity (known as the "client"), in circumstances where the worker would have been regarded for income tax purposes as an employee or director of the client if the services had been provided directly. 

Under the off-payroll working rules which currently apply to private sector clients (and which also applied to public sector clients prior to April 2017) – commonly known as IR35 – responsibility for determining whether the rules apply and accounting for PAYE/NICs (including paying employer's NICs) generally rests with the intermediary.  There have, however, been long-held concerns about non-compliance with the rules by intermediaries. The government has already addressed such non-compliance in the public sector by reforming the off-payroll working rules in this sector from April 2017 to make the client responsible for determining a worker's employment status and to move responsibility for accounting for PAYE/NICs to the party that pays the worker's intermediary (known as the "fee-payer") or, if the fee-payer has no UK presence, the next payer up the chain.  If the client pays the intermediary directly (or there is no other payer in the supply chain which has a UK presence), the client is responsible for accounting for PAYE/NICs.  It was announced at Budget 2018 that this reform would be extended to engagements in the private sector from April 2020. 

On 5 March 2019, HMRC issued a policy paper and consultation document to understand how best to implement the reformed off-payroll working rules in the private sector (https://www.gov.uk/government/consultations/off-payroll-working-rules-from-april-2020).  The consultation is, however, of relevance to both private and public sector organisations; this is because it addresses a number of concerns around information requirements, non-compliance and employment status disagreements under the reformed off-payroll working rules as they currently apply in the public sector, and proposes new rules to deal with these issues which would apply to both private and public sector organisations.  Key points from the consultation include:

  • Confirmation that the proposed reform will not apply to small private sector clients – For these purposes, the government intends to use the existing Companies Act definition for determining whether a company is small and to apply a similar test, but based solely on number of employees and/or turnover, for unincorporated entities;
     
  • Increased information requirements – Under the reformed rules which currently apply in the public sector, clients have to provide a status determination to the party they contract with at the start of the contract and, if requested, reasons for that determination.  In practice, that determination should be passed all the way down the labour supply chain; however there is no legal requirement to do so. 

The government proposes to legislate:

  1.               to require the client to provide the status determination – and, on request, the reasons for that determination – not only to the party they contract with but also to the off-payroll worker directly; and
     
  2.               to require each recipient of the status determination and reasons to pass them on to the next person in the labour supply chain.  The government recognises, however, that this could be cumbersome where labour supply chains are long and complex, and asks whether it would be feasible for the client to provide the information directly to the fee-payer;
  • Addressing non-compliance – Under the reformed rules which currently apply in the public sector, liability for PAYE/NICs can be transferred from one party to another in certain circumstances (for example, where a client fails to provide a determination).  The government proposes to extend these provisions so that:
  1.                liability for unpaid amounts should initially rest with the party that has failed to fulfil its obligations, until such time as it meets its obligations (eg if an agency in the chain fails to send on the determination, it will become liable for PAYE/NICs);
     
  2.                if HMRC cannot collect the outstanding liability from the party that has failed to fulfil its obligations (eg because it has ceased to exist), the liability should transfer back to the first party or agency in the chain; and
     
  3.               if HMRC cannot collect the outstanding liability from the first party or agency in the  chain, it will ultimately seek payment from the client.

This potential for liability to flow back down the chain will make it important for clients and other parties within the labour supply chain to look very carefully at the contractual arrangements which are in place (eg Is there adequate indemnification? How comfortable are they that counterparties are reputable and compliant?);

  • Addressing status determination disagreements – The government recognises that, in some circumstances, an off-payroll worker or fee-payer may disagree with a client's status determination.  The first step in seeking to resolve status disagreements would be to provide the off-payroll worker and the fee-payer with the right to seek the reasons for the status determination directly from the client.  However, it may also be necessary for a process to be put in place to allow for determinations to be challenged.  The government proposes that clients should develop and implement their own processes to resolve disagreements based on a set of requirements set out in the legislation.  As a minimum, the government would expect any process to include the consideration of evidence put forward by the off-payroll worker and/or fee-payer, and advising the party of the outcome of that consideration and the reasons for that outcome;
     
  • Accounting for PAYE/NICs and other levies – Where the rules apply, the fee-payer will be treated as an employer for income tax, NICs and Apprenticeship Levy purposes.  The fee paid to the intermediary will be treated as a payment of the off-payroll worker's employment income when it is paid.  The amount treated as the off-payroll worker's employment income will be the VAT-exclusive amount paid to the intermediary.  The off-payroll worker will be legally required to provide their National Insurance number, tax code and identity details to enable the right tax to be deducted.  The fee-payer will be required to complete the normal RTI process and notify HMRC of the amount of the taxable earnings and PAYE/NICs deducted.  The fee-payer will not, however, be required to make deductions for student loans purposes;
     
  • Enhancing HMRC's "Check Employment Status for Tax" (CEST) service – There are currently concerns about CEST's ability to give an accurate employment status determination in some cases and that it does not adequately reflect the complex nature of the private sector.  HMRC is, therefore, looking to enhance the CEST service and improve the related guidance to assist organisations in making employment status determinations that workers will be able to see and understand.  HMRC also intends to develop an education and support package for businesses affected by the reformed off-payroll working rules

The consultation closes on 28 May 2019.  Draft legislation is expected to be published this summer.

What next?

Businesses should start taking the following actions now to prepare for the reform:

  • Identify and review existing engagements with personal services companies, agencies and other intermediaries which supply workers.  Questions to be asked include: What would the workers' employment status be? Who will be responsible for accounting for PAYE/NICs? Who should bear the cost of any employers' NICs?  What contractual protection is available in cases of non-compliance?  Should we consider bringing the worker on-payroll?  What changes are required to the documentation?
     
  • Review existing policies for engaging contingent workers – these may vary between business functions;
     
  • Put in place comprehensive, joined-up processes to ensure consistent decisions are made and communicated in relation to the employment status of workers engaged through intermediaries, and to allow for such determinations to be challenged;
     
  • Review internal systems, such as payroll software, process maps, HR and on-boarding policies to see where changes are required. 

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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