From 6 April 2021 the scope of the off-payroll working rules (IR35) will be expanded to cover medium and large private sector organisations, employment agencies and third parties within the labour supply chain.
What is changing?
Many contractors or self-employed individuals operate through their own limited company called a “personal service company” or PSC. As a general rule, self-employed individuals tend to pay less income tax and social security contributions in the UK than employees. Currently, the responsibility for deducting the correct taxes and social security contributions rests primarily with the PSC, as does the liability for not paying the correct taxes.
From next month, an individual's tax status will be determined by the end user client to whom a contractor provides their services not the contractor. If the client decides that the engagement falls in the scope of IR35, payment to the contractor's company will be taxed at source - as if they were an employee.
If the relationship genuinely falls outside the IR35 rules, then both workers and their hirers can take advantage of the tax efficiency of working through a limited company. Clients don't have to pay employers' NIC or provide employee benefits to contractors. The individuals themselves benefit from tax efficiency.
Who do the new rules apply to?
The rules apply to all private sector companies that meet two or more of the following conditions:
- an annual turnover of more than £10.2 million
- a balance sheet total of more than £5.1 million
- have more than 50 employees.
This means that there is a small company exemption for organisations which do not meet two or more of the conditions. There are also rules which cover connected and associated companies. If the parent of a group is medium or large, their subsidiaries will also have to apply the off-payroll working rules.
If the end user client is wholly overseas the off-payroll working rules do not apply. The worker’s intermediary (usually a limited company) will be responsible for determining if the rules apply. An organisation is classed as overseas if it does not have a UK connection ie is not resident in the UK or does not have a permanent establishment in the UK.
End user client determines employment status using a Status Determination Statement (SDS)
Clients will need to decide the employment status of everyone they engage through their intermediary or through an agency. They need to take reasonable care when making a determination, provide reasons for the conclusions and communicate the determination using an SDS to the individual or organisation the client contracts with. This process can be carried out before 6 April. Clients can use the Government's CEST tool (Check employment status for tax) to check whether individuals on a specific engagement, should be classed as employed or self-employed for tax purposes.
Preparation for the changes
Businesses should consider:
- Identifying workforce individuals (including those engaged through agencies and other intermediaries) who are supplying their services through PSCs and reviewing labour supply chains. Are contractors engaged directly or via umbrella companies or PSCs?
- Using HMRC's Check Employment Status for Tax service to identify whether the off-payroll rules are likely to apply to any contracts that already extend beyond April 2021. Do the engagements need terminating or be re-negotiated?
- Introducing processes to analyse whether, when future engagements are made, in each case how payments will be made to contractors within the off-payroll rules
- Ensuring that processes are in place to keep detailed records of the employment status determinations, including the reasons for the determination and fees paid and how to deal with any disagreements that arise from the determination.
Last month HMRC published a briefing supporting organisations to comply with changes to the off-payroll working rules confirming that businesses will not have to pay penalties for inaccuracies in the first 12 months relating to the rules, regardless of when the inaccuracies are identified, unless there is evidence of deliberate non-compliance.
HMRC has also committed not to use information acquired as a result of the changes to the off-payroll working rules to open a new compliance enquiry into returns for tax years before 2021 to 2022, unless there is reason to suspect fraud or criminal behaviour.
More information on how Taylor Wessing can assist with your queries can be found here and you can catch up with our recent webinar recording discussing IR35 and its implications for businesses here.
