New rules to be introduced from April 2020 will make certain companies who engage workers through intermediaries (the “client”) subject to:
- assessing whether the workers should be treated as employees of the company; and
- operating employment tax (PAYE and NICs) in respect of payments made to the workers or their intermediary.
Currently these obligations rest with the worker’s intermediary and not with the client organisation.
The off-payroll worker tax rules (known as IR35) were introduced in 2000 to ensure that an individual working for an organisation through an intermediary (often that individual’s personal services company (“PSC”)) who would be an employee if engaged directly by the client is taxed like an employee. Under the rules, the employment tax liability is the responsibility of the PSC (or other intermediary) and not of the client. The difficulties of determining whether or not the individual providing their services should be taxed as an employee under the rules has been highlighted recently with a number of cases involving well-known British television and radio personalities which have come to different conclusions.
The rules were changed for individuals providing their services to public sector bodies in April 2017, so that the responsibility for determining the individual service provider’s employment status and operating PAYE and NICs, if applicable, falls on the public sector body and not the PSC.
Draft legislation has been published in the Finance Bill 2020 which sets out changes to the rules to apply from April 2020 for individuals providing their services to medium- and large-sized organisations in the private sector. These changes are designed to increase compliance with the existing IR35 rules under which HMRC estimate that only one in ten workers currently operates the rules correctly. HMRC’s assessment is that the new rules will generate an additional £3 billion of tax over the next four years.
While the new rules are not retrospective, they will apply to payments made from April next year under existing arrangements.
Determination of employment status – change in responsibility
The new rules will fundamentally change the existing IR35 rules for private sector clients by making it the responsibility of the client to determine the worker’s employment status and, where applicable, operate the payment of the employment tax.
The new rules will not apply where the client organisation is “small”. This is the case where, broadly, it and entities connected with it meet at least two of the following conditions:
- an annual net turnover of not more than £10.2 million (£12.2 million gross);
- a net balance sheet total of not more than £5.1 million (£6.1 million gross); and
- not more than 50 employees.
Where the new rules apply, the client must make a “status determination statement” (“SDS”) about the individual providing his or her services.
If the SDS is that the individual would be an employee if engaging directly with the client organisation, then the client (or, in circumstances where payment is made to the individual through a chain of intermediaries, the entity making payment to the individual’s intermediary (the “fee-payer”), the fee-payer) is required to deduct the PAYE income tax and employee NICs from payment to the individual and pay employer NICs to HMRC.
So, while the client will not always be the fee-payer, the client will always have to review its and the individual’s role in the arrangements in order to complete the SDS. In addition, if the client does not take reasonable care in preparing a SDS, it will be the fee-payer and have the employment tax payment obligations.
HMRC’s CEST service
The on-line Check Employment Status for Tax (“CEST”) service is provided by HMRC to assist in employment status determinations. HMRC notes that, to date, the tool has provided a determination in at least 85% of uses. Notwithstanding HMRC assurances, however, there has been considerable criticism of CEST from users, so private sector clients carrying out a SDS should also consider using their own internal procedures for making the determination.
Transfer of liability
The SDS made by the client should be passed from the client to the individual and his/her PSC and to any other relevant entities in the labour supply chain and should include reasons for the determination. Detailed records should be kept and processes should be implemented to deal with disputes arising from SDSs.
Liability for PAYE and NICs deductions will rest with the client until the SDS (and reasons for it) are passed to the next entity in the supply chain. An entity or individual in the labour supply chain that receives a SDS but fails to pass it on will become the fee-payer. This liability will move along the chain when the SDS is passed on until the entity that makes payment to the individual worker’s intermediary.
HMRC’s consultation on the rules published in March 2019 stated that liability would transfer from the fee-payer entity back to the client in circumstances where HMRC was not able to collect the tax due from the relevant fee-payer in the labour chain. HMRC also suggested that entities in the chain could become secondarily liable even in circumstances where they complied fully with their own obligations.
The response paper to the consultation, published in July, indicated that it was not the intention for any such liability transfer to apply in cases where there was no deliberate tax avoidance and would only apply where a promoter of a tax avoidance arrangement is in the supply chain. The legislation does not shed further light on this issue and it is expected that such provisions might be introduced through regulations in due course.
The draft legislation also introduces a client-led disagreement process. If there is disagreement as to the result of a SDS, clients are required to consider any representations made by the individual worker or the fee-payer. The client has 45 days to respond to the worker’s disagreement from the date of receipt of that disagreement. In this period, the result of the original SDS should be applied.
Significantly, failure by the client to respond to the worker within the 45 day time period means that the relevant PAYE and NICs payments become the responsibility of the client.
What should clients do?
HMRC estimates that 170,000 individuals working through a PSCs who would be employed if engaged directly and 60,000 engager organisations will be affected by the new rules.
All private sector organisations that engage workers through intermediaries and that are not “small companies” should, therefore, review their contractual arrangements to determine whether they are in a position to carry out a SDS and to understand the resulting employment tax consequences for them or any fee-earner in the chain between them and the worker.
These rules will inevitably result in an additional administrative and cost burden for medium and large organisations engaging workers through intermediaries and organisations should, if they haven’t already done so, start discussions with their contractors or intermediaries supplying such workers to try to evaluate whether any contractual arrangements should be changed and how they will be in a position to operate the new rules effectively and efficiently.