The reform of the IR35 rules for the private sector, originally due to take effect last year but postponed due to COVID-19, will now take effect from 6 April this year. The changes involve a major shift of the responsibility for tax compliance from workers’ personal service companies on to their end-user clients.
The reform became law in last year’s Finance Act. It 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 in specified circumstances. These are 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 sector in April 2017. There will be exemptions for small companies and for wholly overseas businesses.
HMRC onine status-checker
HMRC provides an online tool, alongside a set of guidance notes, which businesses can use to help to assess the tax status of any off-payroll workers.
What should businesses do?
We have been helping a large number of our clients to prepare for these changes. Businesses that use off-payroll labour need to audit their off-payroll workforce to ensure that current tax and employment rules are being applied correctly and consistently, and that they are ready for the proposed changes. There is not a great deal of time left to implement the necessary changes in time for 6 April.
Key steps for affected businesses to take are:
- identify your off-payroll workforce
- if any are using personal service companies (or similar unincorporated bodies), assess whether they will still be engaged after 6 April
- if so, try to assess what their tax status will be as soon as possible (we have a questionnaire that can help clients with this)
- review the relevant contracts to see if they will need to be terminated or replaced (eg if they don’t allow for deductions of tax at source)
- proactively communicate with the impacted workforce
- determine your strategy for how to deal with each case
- do the formal status assessments and notify individuals and their intermediaries as required
What practical issues are we seeing?
The reform and the steps being taken are throwing up new issues all the time. Practical considerations to bear in mind include the following:
- Some big employers (eg some banks) announced some time ago that they will not engage with anyone through a personal service company going forward.
- Even where businesses receive off-payroll workers through large agencies, they will need to know whether the worker uses a personal services company because if they do, the business will need to do a tax status assessment and notify the worker and the agency of the outcome. The tax burden will sit with the agency, but not until the determination has been completed and properly notified to the agency. Businesses (and agencies) should therefore review their contracts to ensure the new obligations are properly reflected and appropriate remedies in place for non-compliance.
- If individuals are assessed as employees for tax purposes, businesses can continue to engage with them via their personal services company, deducting tax through the payroll. Alternatively, they could be invited to become (or may want to become) actual employees or workers with the associated legal rights.
- Who will bear the increased tax costs that businesses will have? Contractors’ daily rates often exceed the daily proportion of an annual salary for an equivalent employee (for a variety of reasons, but often including their lack of employment rights/holiday entitlement etc). If businesses are having to pay employers NICs in respect of these contractors going forward, they may seek to reduce the daily rate they pay.
- What should a business do about those off payroll workers who don’t use personal service companies, but perform similar functions as those who do and who the business has determined to be employees for tax purposes? The business will have always been responsible for correctly assessing the tax and employment status of these individuals and could potentially be liable for historic unpaid tax and employment benefits, such as holiday pay.
Many businesses will need to implement new tax processes for their off-payroll workforce by 6 April. The reform will have a significant impact on the operating structures of some businesses and we may see a significant reduction in the use of personal service companies.