Off-payroll working rules from April 2020
Following a consultation in 2018, HMRC has recently published draft legislation to be introduced from 6 April 2020 that place the responsibility on private sector businesses to deduct PAYE and NIC if they engage with workers through Personal Service Companies (PSCs), where the worker would be employed were it not for the PSC. Where the worker is engaged via an agency, the obligation to operate PAYE and NIC will fall on the agency or organisation in the labour supply chain making the payment to the worker’s company.
The proposed rules will align the off-payroll working (or IR35) rules for the private sector with the public sector, which saw similar changes introduced in April 2017.
Small company exemption
The private sector roll-out applies only to medium and large-sized engaging businesses, so small businesses are exempt. Also exempt are businesses that meet two out of the following three tests:
- annual turnover – not more than £10.2m
- balance sheet total – not more than £5.1m
- number of employees – not more than 50
Unincorporated businesses only need to apply the annual turnover test by reference to a single accounting year, rather than the two year test which applies for incorporated businesses.
Where the legislation applies, the end business must inform both the worker and the party they are engaging with of their decision, whether or not the engagement is caught by IR35 (within the same 31 day time limit as currently applies for public sector engagements).
Under the new rules, workers can formally appeal a status decision, which provides for a 45-day period during which the decision can either be confirmed as correct or amended. This process can apply to both private and public sector engagements, although HMRC is yet to publish guidance to confirm the formal appeal mechanism.
HMRC guidance and CEST
To help businesses prepare for and operate the new rules HMRC will publish guidance for organisations, including targeted education packages, such as webinars, workshops and one-to-one sessions with businesses in particular sectors.
HMRC will also enhance its ‘Check Employment Status for Tax’ (CEST) online tool, following negative feedback on the current version and recent tax tribunal rulings that have contradicted status outcomes given by CEST. The improved version will apparently be available later this year.
There remains strong opposition to these private sector changes, with many claiming it will place unreasonable compliance and financial burdens on businesses who need plan for and apply the new rules. The government certainly has a lot on its plate with ongoing Brexit negotiations and some still hope the private sector roll out could yet be delayed to April 2021.
Assuming the anti-IR35 lobby groups fail, affected businesses will need to start taking action now by carrying out employment status audits and putting in admin systems. Given the right approach and sufficient planning ahead, it may be possible in some cases to maintain a flexible workforce that remains outside of IR35.
For some businesses it may be necessary to seek independent advice for professional opinions on employment status and help to identify areas of risk. We have considerable experience within Garbutt + Elliott on both employment status and IR35 matters, and will be happy to provide assistance. Please contact Richard Whitelock on firstname.lastname@example.org or 01904 464151.