17 October, 2019
As of April 2020, the Government are rolling out the off-payroll tax changes made to the public sector to medium and large sized private companies. In April 2017, the Government replaced the original IR35 legislation with new off-payroll tax affecting the public sector. The change puts the onus on the 'end user', essentially the 'hirer', for establishing whether the contractor falls inside or outside of the new IR35 off-payroll tax. If IR35 applies, the hirer, agency or other third party who pays the contractor is required to deduct tax and NICs and report to HMRC.
The legislation is designed to prevent tax avoidance. It is aimed at targeting individuals who should in reality be classed as employees as opposed to contractors, and are paying a lower level of tax as contractors than they would as employees. It affects contractors who provide services to companies through an intermediary, such as a limited company, but who would otherwise be an employee if the intermediary was not used. The intermediary in most cases is a company set up by the 'contractor', although partnerships and managed service companies can also be used.
Contractors tend to use this structure in order to incur a lower level of tax and obtain flexibility which offsets the lack of employee benefits, such as holiday and sick pay. If the changes are deemed to apply to them, they will incur liability for income tax and National Insurance Contributions (NICs), which could potentially reduce their net income by up to 25%. Essentially, the changes are aimed at ensuring that individuals caught by the legislation pay broadly the same tax and National Insurance contributions as they would if they were employees.
The changes will only apply to medium and large sized companies. Any end user other than a company, a limited liability partnership, an unregistered company and an overseas company, will need to comply with the rules if it has an annual turnover of more than £10.2 million. This is known as the simplified test.
End users who are excluded from using the simplified test will need to comply with the changes if they meet two or more of the following conditions, which reflect the small company's regime:
There are also rules around connected and associated companies. For example, if the parent of a group is medium or large, their subsidiaries will also have to apply the changes. For small businesses, the status quo will remain, with calculation of tax liability resting with the intermediary.
If the criteria are deemed to apply, the obligation to determine the employment status of the individual in line with the rules will fall on the end user. In addition, the obligation to pay any tax accrued will shift from the intermediary to the end user. The end user will therefore be responsible for deducting any PAYE and National Insurance due further to the changes in the IR35 rules. End users will hold the liability for tax and National Insurance contributions until they tell the worker, and the person they contract with, of the determination and the reasons for it. Where the end user defaults on the payment of tax, HMRC has the power to shift liability along the line to the intermediary.
In summary, if the end user falls within the criteria and the changes are deemed to apply, the rules require the end user to:
A Check Employment Status Tool (CEST) is available through HMRC that end users can use when determining the employment status. Although there is no obligation to use the calculator, HMRC have indicated that it will respect the result of the tool unless it appears the result has been obtained fraudulently. This provides an element of comfort for end users when calculating status that their decisions will be accepted as accurate by HMRC and as such it would be advisable to use the calculator where possible.
End users would be advised to review their current workforce (including those engaged through agencies and other intermediaries) to identify those individuals supplying their services through relevant service companies and start talking to their contractors about whether the off-payroll rules apply to their role.
Given the liability for any associated tax and NI should workers fall within the ambit of the new rules, it may be more cost effective to hire contractors on fixed term employment contracts if that is a better reflection of the reality of the employment relationship. Alternatively, end users could consider terminating existing contracts and entering into new contracts which reflect these increased costs by reducing the level of payment to the service provider.
It would also be prudent to appoint a specific individual trained to ascertain worker status and whether the rules apply in particular instances.
For more information contact Rosalind Leahy in our Employment & HR department via email or phone on 01772 220185. Alternatively send any question through to Forbes Solicitors via our online Contact Form.