This document is based on the law as stated on 18 March 2020 and may be subject to change.
We have listed some key points to be considered by medium and large private sector businesses when complying with the new ‘off-payroll’ regime, which applies from 6 April 2021 (the ‘off-payroll rules’). IR35 was originally introduced in 1999 and was known as ‘the intermediaries’ legislation’.
IR35 applies where workers supply services to end clients through intermediaries (usually in the form of limited companies known as personal service companies, or PSCs). Originally, IR35 legislation required the intermediary providing the worker’s services to determine the worker’s status for tax.
However, HMRC found that ‘non-compliance with the legislation was widespread’. HMRC estimated that this non-compliance was resulting in a cost to the exchequer of £700m per year. It predicted that this would rise to £1.3bn by 2023/24. As a result, the Government announced a shift in responsibility for tax status determination to the end client, in the hope of improving compliance. Public sector end clients have been subject to this change since April 2017. From 6th April 2021 (deferred from 6th April 2020), medium and large private sector business will be subject to the same rules.
This means that they will be responsible for a) assessing whether IR35 applies and b) in some situations, operating a PAYE scheme and accounting for employer National Insurance Contributions on payments made to off-payroll workers. There is an exemption for ‘small entities’. A small entity applies for incorporated businesses where two out of the three following criteria are met:
- The business has fewer than 50 employees;
- It has balance sheet total assets of less than £5.1 million and/or;
- It has a turnover of less than £10.2 million.
For unincorporated businesses, only the turnover threshold applies.
In relation to those businesses affected, they can use a checklist similar to this:
Consider whether the off-payroll rules apply
- Identify any off-payroll workers operating through an intermediary, such as a limited company. For limited companies to qualify, the off-payroll worker (or someone connected to them) must have at least a 5% shareholding in that limited company.
- Make enquiries of all employment businesses and agencies which may mean that not all off-payroll workers are initially obvious.
- Check whether the off-payroll rules apply based on size and/or turnover (as per above)
- Identify the end user client and the ‘fee payer’. This could be tricky in complex supply chains so care is needed.
Develop a methodology of dealing with the rules
- Subject to some very limited exceptions, the end user client is responsible for determining the worker’s tax status.
- Consider how to make this status assessment. HMRC has a tool called CEST which can assist with this. It provides HMRC’s view on whether the off-payroll regime applies and will guarantee this check subject to the provision of accurate information. Clients could also develop their own assessment tool. Alternatively, commercial offerings are available. Take care to assess them on a case-by-case basis.
- It is best not yet to communicate the status to off-payroll workers. Consider how the rules will impact current working practices and what changes will need to be made including, for example:
a) Employment law consequences where a worker is determined by to be employed for tax purposes;
b) Restructuring of the contractual arrangement so as to clearly define the worker as self-employed (so long as this does not contravene anti-avoidance measures).
Drafting standard documentation
- End clients must implement a dispute resolution procedure on status of off-payroll workers. The current rules provide for a procedure but not for an appeal. It is therefore advisable for include a complete written procedure which sets out a process for dealing with status disputes.
- A Status Determination Statement (SDS) must be provided to off-payroll workers. This declares the deemed status following an assessment and provides reasons for the conclusion as to the status.
- Review existing Consultancy/Service Agreements.
- Review agreements with agencies/employment businesses who provide off-payroll workers who supply services through an intermediary.
- Review business to business agreements where the services include those provided by off-payroll workers. Who is the end client?
Open up discussions
- Ensure that all contractors are aware of the rules and what steps are being taken. See HMRC for communications resources.
- Issue the SDS. End clients must pass the SDS along the change as well as directly to the off-payroll worker to ensure that everyone is aware of the status decision.
- Manage any disputes as to status.
- The fee payer is responsible for operation PAYE and accounting for employers’ NICs.
- Systems made need upgrading.
- Discussions will need to be had with end clients since extra costs will be added and budgets amended.
- Ensure implementation by 6th April 2021.
- Regularly review off pay-roll engagements. Procedures will need to be implemented to ensure such reviews.
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