Prepare for off-payroll working in the private sector

  • By Shan Hughes
  • 27 June 2019 00:00

As you are no doubt aware from 6 April 2020 new tax rules are proposed for individuals who provide their personal services via an ‘intermediary’ to a medium or large business. An intermediary may be another individual, a partnership, an unincorporated association or a company however the most common structure is a worker providing their services via their own company (PSC). 

Similar rules were introduced in 2017 for public sector organisations receiving services from PSCs. The 2020 rules will use the 2017 rules as a starting point but some aspects of the detailed operation of the rules will be decided in a consultation process. The consultation can be found at https://www.gov.uk/government/consultations/off-payroll-working-rules-from-april-2020

The effect of these rules, if they apply to PSC clients, will be:

  • the medium or large business (or an agency paying the PSC) will calculate a ‘deemed payment’ based on the fees the PSC has charged for the services of the individual
  • generally, the entity that pays the PSC for the services must deduct PAYE and employee National Insurance contributions (NICs) as if the deemed payment is a salary paid to an employee
  • the paying entity will have to pay to HMRC not only the PAYE and NICs deducted from the deemed payment but also employer NICs on the deemed payment 
  • the net amount received by the PSC can be passed onto the individual without the company deducting any further PAYE and NICs.

The new tax rules apply to amounts paid from 6 April 2020 and so may affect current contracts. There may also be pressure from businesses to renegotiate contracts due to their increased cost of employer NICs. It is time to talk to your PSC clients about the implications of this change.

Medium or large business

The government intends to use an existing statutory definition with the Companies Act of a ‘small company’ to exempt small companies from the new rules with a modified version of the definition likely to apply to unincorporated businesses. 

The decision

The medium or large business will decide whether or not the rules apply. The business needs to form an opinion as to whether, if the personal services of the individual were provided under a contract directly between the individual and themselves, the individual would be regarded as an employee of the business. 

HMRC has a Check Employment Status Service tool (CEST) to help businesses decide the status of individuals providing personal services to them. This tool has come in for some criticism and HMRC is currently working ‘to identify improvements to CEST and wider guidance to ensure it meets the needs of the private sector’.

Businesses may be tempted to err on the side of ‘deemed’ employment particularly if CEST indicates employment due to the shift in responsibility explained below. You can find the HMRC Employment Status Service tool at www.gov.uk/guidance/check-employment-status-for-tax.

Why are these rules been introduced?

The 2020 rules will replicate many of the effects of the ‘intermediaries’ legislation’ (often referred to as the IR35 rules). HMRC has found it difficult to enforce their view of the applicability of the IR35 legislation to many PSCs. Many view the risk of being ‘caught’ by IR35, and thus being required to pay PAYE and NICs, is outweighed by the benefit of company profits being paid out under a ‘low salary, balance as dividends’ regime.

The new legislation therefore shifts the responsibility to the business receiving the services of the individual. This means that the risk of non-compliance falls onto that business. If the business decides the new rules do not apply they may have to have a protracted dispute with HMRC which ultimately may go to a Tax Tribunal. If the Tribunal decides against the business, the business will have to pay over PAYE and NICs to HMRC, having already paid the gross fees to the PSC.

Challenging the decision

The government is expected to require the medium or large business when it makes a status determination to:

  • communicate the decision to the worker, and 
  • give the reasons for that determination if requested by the worker.

This will be in addition to communicating the decision to the party with whom the business has contracted; for example an agency.

Where the PSC worker disagrees with the decision, the first step is to ask for the reasons for the determination. You can use the CEST tool to see if you obtain a different conclusion. If you obtain a result which confirms self-employment you can discuss the results with the business or you can contact us to discuss the matter. Even if you obtain an employment result, this does not necessarily mean the result is correct. HMRC state that the current tool is ‘able to determine employment status in 85% of cases’ which, of course, means it is not correct in 15% of cases. Many commentators consider the accuracy of the tool to be much lower.

As already stated, HMRC is currently working with stakeholders to enhance the service and guidance on the use of CEST but many consider that the law on status is too complicated for a yes/no checklist to provide the right answer in all cases.

The government is not expected to allow a formal right of appeal to HMRC or the Tax Tribunals in the legislation by the worker or the PSC. Instead, there may be a requirement for the medium or large business to have a process to resolve disagreements based on a set of requirements set out in legislation. The ICAEW has called for a formal tax appeal process to be introduced in their response to the consultation. 

Internet link: https://www.icaew.com/-/media/corporate/files/technical/icaew-representations/2019/icaew-rep-54-19-off-payroll-working-rules-from-april-2020.ashx.

Tax implications

The worker engaged via the PSC will be treated in basic PAYE terms as an employee of the entity that pays the PSC for their services and should issue forms P45 and P60 as appropriate showing the total payment and deductions.

The PSC receives the amounts from the paying entity and under the proposed rules the worker can then extract the income tax-efficiently. In addition, the PSC is able to deduct the amount of the payment it receives, as well as the PAYE/employee NICs cost, from its taxable income, so it will not be taxed twice.

We have written a client letter to update and prepare your PSC clients for these changes.

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