Off-payroll working rules from 5 April 2021 – What are they, how do they affect me, and what should I do now?Posted 2019 by Chris Davies
Since its introduction in 1999 IR35 has been a cause of major confusion. The rules are difficult to understand and difficult to enforce. According to HMRC they estimate the cost of non-compliance to be in the region of £1bn per year
Since 1999 the responsibility for deciding whether a contract was a deemed employment lay firmly with the personal service company (PSC). If it was later found that the correct tax and national insurance had not been paid to HMRC then it was the PSC that would be required to pay over the correct amount plus interest and penalties. That changed in April 2017 for those working in the public sector, when the responsibility for determining status was passed to the payer.
From 6 April 2021 that obligation will be extended to all private sector medium and large sized businesses engaging PSCs. The end client will be responsible for determining the correct status and the payer (ie client or agency where an agency is involved), will be responsible for deducting and accounting to HMRC for the correct amount of tax and national insurance. The end client and each subsequent entity will need to pass the status determination down to the next entity in the chain until it reaches the payer. Where the payer does not account for the correct tax (eg its insolvency), it is proposed that HMRC can seek redress from the next party upwards in the chain and continue upwards as far as the PSC if necessary. That threat is expected to ensure that each party in the chain takes its obligations under the new rules very seriously.
The new rules will not apply to small companies engaging PSCs where responsibility for determining the correct status will, as before, remain with the PSC.
The definition of a small business is as per that in the Companies Act ie
- Annual turnover less than £10.2m
- Balance sheet total less than £5.1m
- Average number of employees less than 50
There are separate but similar rules for determining the size of small businesses that are not companies such as LLPs and unincorporated businesses.
PSCs that are caught by the new rules will feel a significant pinch on their net after tax pay. No longer will they be able to offset travel expenses and other costs incurred eg insurances, office costs, professional fees, etc, nor will they be able to take advantage of income tax planning opportunities involving sheltering taxes at lower rates within the company or distributing income at a lower tax rate to the worker’s spouse. Consequently, the PSC may seek to renegotiate rates with its clients.
If the client has determined that the engagement is caught by the off-payroll working rules, then unlike the system prior to 6 April 2021, it will be the payer (ie agency or client) that suffers the employer’s national insurance cost and apprenticeship levy. The payer will therefore be faced with a potential double whammy of simultaneous increased taxation and pressure from the PSC to increase rates.
I have seen figures quoted that suggest that to ensure the same net take home pay, the PSC would need to increase contract rates by as much as 43% whilst conversely the client would need to reduce rates by about 20% to keep hiring costs about the same. Obviously there is a huge divergence in those numbers.
End-clients are advised by HMRC to use their employment status (CEST) tool to determine employment status. This tool has come in for an enormous amount of critiscm since its inception. It is often accused of being weighted in favour of reaching a “caught by IR35 decision”. In fact, on many occasions it has reportedly failed to give the same results reached by the Courts that have found engagements to be outside of IR35. HMRC have promised to work on and enhance this tool but it is difficult to see how it can possibly take into account every factor and nuance that is individual to each case put to it.
In the event that a PSC disagrees with the decision reached by the client then there is a status disagreement process between the PSC and the end client. HMRC appear to be taking a back seat on this and we believe that agencies and end clients will listen favourably to an independent assessment, which properly analyses and documents PSCs engagement(s).
We recommend that before 5 April 2021 PSCs create a body of evidence demonstrating that they are a truly independent contractor – this involves looking at the contractual terms and seeing what may need to be changed about the working practices to demonstrate that the PSC is genuinely in control of how the work is done.
We are offering clients access to a contract review service because the starting point for status determination is the contract. Why? Because that’s where HMRC start an enquiry; it’s also how Tribunal Judges start their decision-making process. Even before 2021, there are benefits to having a review.
In the short term nothing changes for PSCs – they are still the decision-maker and will suffer the tax liability. Get it wrong and HMRC won’t just want the tax; they will want interest and will want to know how the PSC reached that decision. If it cannot show due diligence, then the PSC can expect a penalty of at least 15% of the tax at stake.
HMRC haven’t categorically ruled out that they won’t look back in time. So surely it makes sense to know where the PSC stands now?
When the decision-making process changes for those with contracts with medium and large sized businesses, agencies and end clients will want hard evidence – not emotional pleas – to be convinced that an engagement is ‘not caught’ by IR35. Well-reasoned evidence with a clear conclusion; a documented argument to convince the agency AND the end client to agree the ‘not caught’ opinion.
If HMRC challenge the decision, it is much harder for them to win their argument if all parties have agreed the status decision, based on a clear, independent assessment.
If you are concerned about your status or would like any advice regarding the above please get in touch with us through the Contact US form on our website or call your usual point of contact within the firm.
You may also like to read our article – Off-payroll working and closing my company. What are the options?