From 6 April 2020, changes to tax legislation regulating off-payroll working (commonly known as IR35) will come into effect. These new rules will require larger private sector businesses to deduct income tax and National Insurance contributions via payroll from fees for services, paid to a personal service company, where the individual performing the services would (but for the personal service company) ordinarily be regarded as an employee of the client company for tax purposes.
This is a change from the current position, under which the tax liability rests with the personal service company. The change will be accompanied by obligations on the client company to determine the correct position for each engagement and notify the other parties involved.
Similar changes were introduced in the public section in April 2017. There will be an exemption for small companies (as defined in the Companies Act).
The position in respect of individuals who are engaged directly by a client company (ie, where the agreement is with Joe Bloggs, rather than Joe Bloggs Limited) will remain the same. The correct tax treatment of the fees paid to such individuals will depend upon whether they are, in reality, an employee of the client company for tax purposes or genuinely self-employed.
What is the relationship between tax and employment status?
These rules will come into effect at a time where there is increasing uncertainty about the status of individuals for employment rights purposes, particularly those working in the gig economy.
The employment status rules for tax and employment rights purposes overlap, but are not completely the same, particularly because the intermediate “worker” status is not recognised for tax purposes. Please see our earlier briefing here for an explanation of the difference, and for an update on the Uber litigation and other gig economy cases.
Businesses should, in advance of April next year, conduct an audit of their off-payroll labour. That process should start sooner rather than later where a large number of individuals are involved as individual decisions are likely to be required and notified for each engagement with a personal services company. It may be prudent for businesses to also audit their off-payroll labour not provided through personal service companies.
By “audit” we mean investigating the factual position – what does each individual do in practice, how do they do it, what contracts are they engaged under, how are they paid, etc? We can help to prepare a list of relevant questions for this stage of the process, some of which can be handled in-house if that is more efficient.
Individuals supplied through agencies who are employees of those agencies are not affected by these changes.
When similar changes were introduced in the public sector two years ago, many organisations were caught out by the changes or attempted to impose “global” determinations which were then challenged by their contractors. It therefore pays to be prepared.
Having audited their off-payroll labour, businesses should seek legal advice on their tax and employment law position. It is important that the advice sought is legal advice (rather than from accountants or other professionals). This is because the determination of tax status is likely to take into account similar factors to those used to determine status for employment law purposes and legal advice is privileged and not disclosable in any future litigation.
There are other potential knock-on consequences of this exercise, for which legal advice should also be sought, including amending or drafting contractual documentation where relevant, and advising on the effect on pension liability, immigration, apprenticeship levy, gender pay reporting figures and strategy due to the upcoming changes following the Taylor review. If liabilities are identified or a revised model of working is required, then accountancy advice may be needed to quantify the position.
For more information on these changes and how your organisation can respond, please contact the author Kevin Lowe, our head of employment David Mills or your usual Mills & Reeve contact.