The reform of the IR35 rules for the private sector is receiving some attention from all the main political parties in the run up to the election next week, with some suggesting the proposed reform may be reviewed, or even shelved (although that suggestion was quickly also changed to “reviewed”!)
The proposed reform, which is due to become law in April 2020, 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.
See our previous article for more details of the proposals.
HMRC continues to prepare
HMRC has recently released an updated version of its online tool, which businesses can use to help to assess the tax status of any off-payroll workers. This can be accessed here https://www.gov.uk/guidance/check-employment-status-for-tax alongside a revised set of guidance notes https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm11000.
What should businesses do?
We are currently helping a large number of our clients to prepare for the proposed changes. Whatever the outcome of the election, it is prudent for businesses 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. By the time that the outcome of any review is known, it may be too late for some businesses 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 asap what their tax status will be (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). Note that if 3 months’ notice is required, this will have to be done before 6 January;
- proactively communicate with the impacted workforce;
- determine your strategy of how to deal with each case;
- (once we have a new government and know that the reform is proceeding) do the formal status assessments and notify individuals and their intermediaries as required.
What practical issues are we seeing?
The proposed reform and the steps being taken are throwing up new issues all the time. Practical considerations to bear in mind:
- some big employers (eg some banks) have announced 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.
Whatever the outcome of the election and the IR35 reform, it is simply good practice for businesses to be aware of the extent of their off-payroll workforce and the terms on which it is engaged. If the reform goes ahead, it seems likely that it will have a significant impact on the operating structures of a number of businesses and we may see a drastic reduction in the use of personal service companies.