From 6 April 2021, the tax rules applicable to off-payroll individuals working through intermediaries in the private sector are changing.
Off-payroll working: what is happening?
Under the new rules, large and medium sized businesses (referred to as 'end-clients') will be required to determine the employment status for tax purposes of individuals engaged to provide services to them through an intermediary. These are very technically complex rules with a lot of potential permutations, but in summary, from 6 April 2021, end-clients will have new legal obligations and both end-clients and agencies may be liable for income tax and National Insurance Contributions. This is because, under the new rules, if the individual is 'deemed employed', the end-client (or potentially an agency) will have the obligation to operate PAYE as if the individual were an employee, deducting tax and National Insurance Contributions, as well as paying employers' National Insurance Contributions.
As such, we recommend affected parties consider taking advice to check they are able to comply without suffering the potentially significant financial impact the rules could have. An individual contractor's net income could be reduced by up to 25%, costing the typical contractor who works through a personal services company thousands of pounds in additional income tax and National Insurance Contributions. End-clients may find themselves with higher costs overall, as individuals and agencies try to limit the impact of their own reduction in net income by re-negotiating fees.
Recent Government updates to its guidance
Updated legislation in the Finance Bill 2021 is due to clarify that the new rules will not apply to engagements in respect of which PAYE and National Insurance Contributions are already being deducted and withheld in respect of the fees payable. Nor will the rules apply if, broadly speaking, there is no personal service company (or other intermediary entity used for a similar purpose) involved in the arrangements in question.
The Government has also provided guidance on how to deal with contract extensions and changes to working practices, clarifying that a simple extension on existing terms and conditions is unlikely to trigger a need to review the original status determination. Where changes are made to terms and conditions or working practices however, a new status determination will also need to be made.
Deemed employment – a reminder
To establish whether the individual will be deemed employed for tax purposes, there are a number of legal tests established in case law. In applying these tests, courts and tribunals will consider what is written in the contracts as well as how the relationship operates in practice. The main factors taken into account when determining status are:
- mutuality of obligation (is the individual required to provide the services in return for remuneration?)
- personal service (is the individual required to provide the services personally, or is there a genuine right of substitution?)
- control (does the end-client exercise a significant degree of control over the way in which the services are performed?)
End-clients may wish to use HMRC's 'Check Employment Status for Tax' (CEST) tool on its website and although there is no obligation to do so, many will use the CEST tool as their default method to determine status. Alternatively, seek professional advice to help develop an appropriate checklist of criteria.
The end-client is required to take 'reasonable care' when making the status determination. The Government has published guidance on what is meant by 'reasonable care' which is designed to prevent end-clients from making blanket status determinations rather than considering each situation separately, on a case-by-case basis. Using the CEST tool will satisfy the requirement for 'reasonable care' provided the answers given are not inaccurate or misleading.
Note that deemed employment status for tax or IR35 purposes does not equate to an entitlement to statutory employment rights. If a contractor is deemed employed for the purposes of IR35 rules, they will not automatically benefit from rights such as protection from unfair dismissal, holiday/sick pay or pension contributions. However, being deemed employed for tax purposes may result in more claims to establish employment status.
Status determination statements – what do end-clients need to do?
The new rules introduce an obligation on the end-client to determine employment status of an individual who personally performs services through an intermediary. The rules work slightly differently in cases involving a 'chain' of entities such as those involving an agency in addition to a personal service company (PSC). Even in such chains, however, unless and until the end-client has complied with their obligations in relation to determining status, it is still the end-client who has the liability to account for any PAYE due. Once the end-client completes its status determination, it must pass this to the fee payer who then becomes responsible for operating PAYE.
The end-client will therefore be required to:
- provide the worker (and whichever entity the client is contracting with, for example the agency or PSC) with a status determination statement
- give the reasons behind that determination.
Until the status determination has been carried out and the status determination statement has been provided to the individual worker (and any agency or fee-payer), the responsibility for operating PAYE and deducting and withholding income tax and NIC remains with the end-client. Similarly, if another party in the chain fails to pass on the status determination, that party will bear the initial liability for the PAYE and NIC, if it should have been paid.
If the fee-payer subsequently fails to operate PAYE and the fee-payer entity is an agency, or any other entity in the chain between the client and the PSC, then the end-client (or other parties in the chain) may be held liable to HMRC for the unpaid employer's NIC (and Apprenticeship Levy, if applicable). In other words, HMRC can shift liability along the chain to other entities operating in it, such as a personal service company or agency.
In addition, the end-client will be required to operate a process for dealing with disputes over the status determination. If the individual worker (or agency) make representations to the client that they disagree with the status determination, the end-client will need to decide within 45 days of receiving notification whether to uphold the determination or alternatively, to provide a new determination, giving reasons why.
The rules do not apply to small businesses
The new rules only apply to medium and large companies (broadly, companies that are required to be audited). To qualify as 'small' (meaning the old IR35 will continue to apply), a business must meet at least two of the following conditions in the relevant tax year:
- turnover of not more than £10.2m
- aggregate assets on the balance sheet of not more than £5.1m
- not more than 50 employees.
Note, connected persons must be taken into account in determining whether a company qualifies as 'small'. This is defined by reference to the Companies Act 2006 and means that a subsidiary of a group will not be regarded as 'small' unless the group itself fulfils the criteria.
The position will therefore not change for small businesses, with the old rules continuing to apply, meaning the obligation to determine and pay tax remains with the intermediary.
What can end-users do to prepare?
- Review your existing contractor arrangements (including those engaged through agencies and other intermediaries) to identify those individuals who may be deemed employees if they were providing their services directly.
- Use the CEST tool or draw up a checklist of relevant factors to apply to individuals currently engaged on contractor arrangements to help make a status determination. Use a template to record reasons for the decision.
- Consider alternative ways of hiring staff, e.g. by offering direct employment (permanent or fixed term), amending existing contractor contracts, using agencies to supply payrolled labour, using indemnities in supply contracts to minimise risk, adopting a fully outsourced services model.
- Review contracts with agencies and employment businesses to address off-payroll liabilities, risks and compliance concerns.
- Provide training on risk and compliance obligations to key staff and those carrying out status determinations to ensure 'reasonable care' is exercised in applying the rules.
- Prepare for challenges to determinations to be made and budget for potential extra costs.
- Start talking to your contractors about whether the off-payroll rules apply to their role. If you do decide that the regulations don't apply, make sure you can evidence why, in case HMRC decide to undertake an audit.
How can Birketts help you prepare for the off-payroll working rules?
Birketts already has considerable experience in helping clients prepare for the off-payroll working rules. We can help by auditing your current staffing models, advising on the risk profile of individual contractors, providing advice and suggestions on amendments to existing contracts, reviewing and amending internal hiring templates, policies and procedures and training key stakeholders on IR35/off-payroll changes, including on making status determinations.
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.