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Off-payroll working in the private sector reforms

The steps so far and the processes to be put in place before April 2020.

07/01/2020
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Crowe will be able to assist in helping organisations review their engagements with off-payroll workers, by producing detailed employment status reports which help minimise risk where the position is not clear.

Step 6: Considering employment status and the tools available to help

From April 2020, end users will be expected to take reasonable care in determining whether IR35 applies to their engagements.

There are different ways an organisation can find out the status of their engagements in order to demonstrate to HMRC that they have assessed the employment status of a contractor, including:

1.

 

  carrying out employment status reviews for each individual engaged via a personal service company or similar intermediary –
  you may use HMRC's Check Employment Status for Tax (CEST) tool and then feed this back to the individual.
2.     obtaining external specialist advice to assess status based on every detail of the engagement.

Given the guidance available, you should think carefully about each individual’s status; understand what is happening on the ground and then look at the paperwork. Make sure the paperwork and the reality tell the same story (just because a contract says that someone is self-employed, it does not mean that HMRC will agree if the facts suggest otherwise).

The CEST tool can be used by a hiring company, an agency or an individual in order to test employment status. It is not compulsory to use CEST and it should not be used to consider whether an individual has employment rights for employment law purposes.

However, HMRC has indicated that it will stand by CEST results provided the information input is accurate and it is used in accordance with their guidance. Therefore it is an important tool to use when considering the employment status of individuals as it can be used to support any arguments put to HMRC.

The Updated CEST

In response to the criticism of CEST, HMRC launched a new CEST tool on 25 November 2019 which took the maximum number of questions from 16 to 30.

The updated CEST included some new parameters to the substitution test.  For example, if a worker has the right to provide a substitute and puts this into practice, the worker should be determined as ‘not an employee’ and therefore outside of IR35. However, where an agency provides the substitute, this does not apply and, in order to be outside of IR35, it is important that the worker pays the substitute, not the agency.

CEST may conclude a worker is outside the scope of IR35 based on isolated areas. This is common in the substitution section which does not look at the full picture. Therefore, if a result appears at odds with what you as the engager expect, you should consider taking specialist advice

The updated CEST tool includes questions on the nature of the work and exclusivity, including whether the individual can work for another organisation doing a similar role. It also asks whether the worker is subject to a restraint of trade clause.

Unfortunately it still doesn’t include mutuality of obligation (MOO); HMRC simply assumes that MOO is present in all contracts for services by default, which is not the case at all. Under HMRC’s rules, it could be argued that, if there is no MOO, there is no need to assess the status of the individual or use the CEST tool. However, in reality, MOO is key. In order to assess whether a contract is of employment or self-employment, we must first consider whether the engager is obliged to pay a wage and if the worker is required to provide their own work.

It is recommended that you keep a record of your employment status reviews, including any CEST tests and any information you have compiled to help enter the details into the tool.

HMRC's stance in recent cases (such as RALC Consulting Ltd) has sought to disregard the evidence of its own tool and argue against its output. In this case, it ignored that MOO existed as part of a contract and ruled that the outcome of the CEST was irrelevant as the answers had not been accurately answered. Therefore, HMRC claimed that due care had not been taken. This adds to the importance of compiling the full facts to support any challenge at a later date, should you need to defend yourself.

While other providers are offering alternatives to CEST, it is the only tool that can be used which HMRC will normally stand by on the basis that the information input is accurate and aligns with a contract and working conditions. It should be noted that the CEST tool will only say that an engagement is outside IR35 when there is absolute certainty.

Therefore, employers should consider how much reliance they place upon CEST and, although the new CEST is an improvement, if you are in any doubt, you should seek a second opinion from a specialist who can build a ‘picture of status’ in order to support any CEST result carried out.

Step 5: What responsibilities do I have?

If an off-payroll worker is deemed to be an employee under the IR35 legislation, then tax and National Insurance contributions (NICs) may be due to HMRC. In our previous guidance, we have looked at how a worker’s employment status should be reviewed and established in light of the upcoming off-payroll working legislative changes. This month, we look at how this requirement will tie in to the changes that will be implemented on 6 April 2020.

What steps do I need to take as a potential fee-payer?

If you receive a status determination statement that shows an off-payroll worker is deemed to be an employee, then you should check if you’re the fee-payer for that worker. According to government guidance, to be the fee-payer “you must be the lowest party in the labour supply chain”. In the vast majority of cases, this will be the entity which pays the worker’s intermediary, or the entity which pays the worker directly.

This entity must also meet the relevant eligibility criteria to be liable as the fee-paying agent, outlined as follows:

  • either be resident, or have a place of business in the UK
  • pay an intermediary which is either controlled by the worker, or the associate of the worker (see below for details of what type of intermediaries are liable)
  • not be controlled, or not have material interest held, by either:
    • a worker, or with one or more associates of a worker
    • an associate of a worker, with or without other associates.

If you, as a fee payer, are expecting to receive a status determination statement and do not, then you may pass on any outstanding payments to the next party in the supply chain without deducting tax or NICs. However, it is recommended that you enquire with the party above you in the labour supply chain as to why the status determination statement is still outstanding.

How should I calculate any payments made to a worker if they are deemed to be an employee?

If a worker’s engagement status is that of an employee of the end client, then there will be a ‘deemed direct payment’ to be made.

To calculate this payment due, you should take the following steps:

  1. Work out the value of the payment to be made to the intermediary, deducting any applicable VAT costs
  2. deduct the value of any direct costs for materials that will be used in the worker providing their services
  3. deduct any expenses which the intermediary has met directly, which would have been deducted from taxable earnings if the worker were an employee
  4. the remaining amount will be the ‘deemed direct payment’.

You will then need to deduct the relevant tax and NICs from this payment, and make payment of the remaining sum to the worker’s intermediary. You can calculate outstanding tax and NIC using your payroll software or Basic PAYE Tools.  

All tax and NIC (Employers and Employees) will need to be deducted and reported to HMRC via Real Time Information (RTI).

If you are the fee payer, you are not responsible for deducting any student loan repayments or statutory payments. In addition, the worker should not be included on any pension schemes arranged via auto-enrolment. The worker should ensure that any such applicable payments are made via their own intermediary.

Are all intermediaries liable to fall within IR35?

An individual may fall under IR35 if they provide their services to an end client via an ‘intermediary’. This can be any of the following:

  • A company
  • A partnership
  • An unincorporated association
  • An individual.

However, not all of these organisations will automatically be classed as ‘intermediaries’; only if the organisation meets certain conditions.

If the intermediary is a company then the worker (or their associates) must meet one of the following conditions for IR35 to apply:

  • they have a ‘material interest’ (meaning an ability to control, either directly or indirectly, more than 5% of the ordinary share capital of the company) in the company
  • the payment received by the worker can “reasonably be taken to represent” remuneration for the services that they provide to the client.

If the intermediary is a partnership, then one of the following conditions must be satisfied for IR35 to apply:

  • The worker (alone or with one or more relatives), is entitled to 60% or more of the profits of the partnership
  • most of the profits of the partnership come from the provision of services for engagements with a single client and that client’s associates
  • the income of any partner is based upon the income generated by that partner from relevant engagements.

If the intermediary is an individual, the legislation will apply if:

  • A payment or benefit is received or receivable by the worker directly from the intermediary
  • this can reasonably be taken to represent remuneration for services provided by the worker to the client.

If any of the above apply to the intermediaries via which the worker is engaged, then the end client in the supply chain should conduct a review of the worker’s employment status to establish whether the relationship is one of employment. If they do not then the engagement is outside the new IR35 rules.

Step 4: HMRC publish initial draft guidance

The government have now published guidance regarding the proposed IR35 changes which will be implemented on 6 April 2020.

This guidance confirms that the proposed changes to the legislation will be go ahead next spring, in an effort to curb what has been viewed as excessive non-compliance to the current regulations. It has also made it clear that even where workers are engaged through an agency it will be necessary for the end client to take a view on the status of the worker.

What will happen?

For private sector companies, it is currently the responsibility of any off-payroll workers to assess their own employment status when engaging with their relevant client company.

From 6 April 2020 onwards, all public sector bodies, and medium and large-sized private sector organisations, will be responsible for determining the status of all off-payroll workers whom they engage. Charities, schools and colleges and professional practices which fall within the above groups will also need to apply these new rules.

If you meet the criteria to be a small private sector company, then the new rules will not apply to you. You need to meet two of the following criteria to be classed as a small company for these purposes:

  • have an annual turnover of less than £10.2 million
  • a balance sheet total of less than £5.1 million
  • less than 50 employees

Unincorporated bodies only need to fail the turnover test to be 'not small' for these purposes.

What do I need to do now?

You should identify any off-payroll workers whom you currently engage and review your engagement arrangements with them as a matter of priority.

If the rule changes apply to your organisation, you will be responsible for determining the employment status of any off-payroll workers whom you engage. Unfortunately, there is no simple definition as to what makes an ‘employee’ for tax purposes, so you should look at the elements of their engagement. For example, does the worker have the unfettered right to send a substitute if they are unable or unwilling to carry out their work? Do they have substantial control over how they are expected to complete their work? Analysing their engagements in detail will help you to establish a decision regarding their status and the recent IR35 tax tribunal victory for HMRC makes it clear how important this is.

In summary you must:

  • decide the employment status of a worker - you must do this for every contract you agree with an agency or worker
  • pass your determination and the reasons for the determination to the worker and the person or organisation you contract with.  This  is known as the Status Determination Statement
  • make sure you keep detailed records of your employment status determinations, including the reasons for the determination and fees paid
  • have processes in place to deal with any disputes that arise from your determination and:
    • consider the reasons for disagreeing given to you by the worker or agency paying their intermediary
    • decide whether to maintain the determination because you feel it is correct and give reasons why, or withdraw the determination because you feel it was wrong
    • keep a record of your determinations and the reasons for them
    • inform the worker and fee payer if your determination changes and tell the worker if it does not.

What are the potential tax implications for my organisation?

If you are the fee payer to any off-payroll workers, then you will be required to deduct tax and National Insurance contributions from their pay from 6 April 2020 onwards if you establish their engagement status to be one of employment. The employers NIC and any resulting apprenticeship levy payments will represent an additional cost for you.

So you will need to:

  • calculate the deemed direct payment to account for employment taxes and NIC associated with the contract
  • deduct those taxes and employee NIC from the payment to a worker’s intermediary
  • pay employer NIC
  • report to HMRC through Real Time Information the taxes and NIC deducted
  • apply the apprenticeship levy and make any payments necessary

It is important to note that:

  • the employment allowance cannot be used against these payments
  • the new rules apply to any payments made to the worker’s intermediary on or after 6 April 2020, even if the work was done before 6 April 2020.

Next month we will tell you more about how to do the relevant calculations and correct any errors.

Step 3: Where are we after the draft legislation

In July 2019, the UK government published the draft legislation which forms the basis of the reform of off-payroll working in the private sector.

This confirms that the proposed IR35 changes will come into effect from April 2020 to bring the private sector in line with the current public sector arrangements in place since 2017.

What you need to know

The assessment the employment of workers engaged through intermediaries will now fall on the engaging organisation.

Small businesses* will be initially exempt from operating these new rules.

Businesses involved will need to issues a written Status Determination Statement (SDS) and then pass down to everyone involved in the engagement.

If the engaging business determines that IR35 applies, it must deduct PAYE and National Insurance from payments for the worker’s services

*A small company is defined as meeting two out of three of the following criteria: A turnover of less than £10.2 million; balance sheet of less than £5.1 million; or fewer than 50 employees, while an incorporated business need only exceed the turnover limit to be considered ‘not small’.

What should you be doing next

  • Take action now to ensure compliance.
  • Identify any off-payroll workers and review terms of their engagement.
  • Prepare and issue the relevant Status Determination Statements to issue to off-payroll workers.
  • Create a robust process for future off-payroll workers that are made available to everyone in the business.
  • Evaluate your business strategies and determine whether your methods of engaging workers is compatible with the new legislation.
Step 2: Assess your risk and organisational needs.

Having identified all key stakeholders and off-payroll workers in your organisation, this will feed into the next step of a two-fold assessment of the organisations’ risk appetite measured against the business needs.

Options going forward - 6 April 2020

   ic_keyboard_arrow_right_black_24px Employing the individual 
 ic_keyboard_arrow_right_black_24px Engaging with a PSC inside the rules (PAYE/NIC)
 ic_keyboard_arrow_right_black_24px Engage with self-employed individuals (no intermediary)
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Engaging an agency or umbrella company  

Risk and organisational needs

For those who are risk averse, the above outlines several alternatives to engaging off-payroll workers caught by the new rules, which may involve changing your business model.

Employers should evaluate their business and operational strategies in light of how exposed they are to these reforms and their future business needs – do you need to conduct a GAP analysis, or have internal discussions with key stakeholders?

If you wish to continue engaging with PSCs, then it will become the engager’s responsibility to perform and evidence an employment status check on the individual. Employment status is a subjective area based on case law rather than legislative tests and as a result, there is an embedded risk.

The risk of getting status wrong is expensive. ic_keyboard_arrow_right_black_24px  Back taxes four years or six years depending on which rules apply, NIC for six previous years. ic_keyboard_arrow_right_black_24px Risk of challenge from workers if wrongly classified - breach of contract?

 

Ultimately, what is right for your organisation going forward may differ from others, and therefore it is essential you take the time now to discuss these effects head of 06 April 2020.

Step 1: Identify key stakeholders and all off-payroll workers.

HMRC’s consultation on off-payroll working closed on 28 May 2019 and will inform the draft legislation on this area which is due to be published in the coming months.

While we wait for the draft legislation, an important first and proactive step is to identify key stakeholders and all off-payroll workers. This includes all current engagements with intermediaries including personal service companies and agencies that may supply labour to your organisation.

Completing these tasks early on will enable you to:

Step 1

 

Step 2

 

Step 3

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Evaluate how exposed is your organisation.

Do you mostly engage off-payroll workers in a particular business functions e.g. IT? Can this function be fully outsourced instead?

Are these workers engaged regularly?

 

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Communicate potential impacts to key stakeholders ensuring they are part of future discussions on this topic.

Who are the affected populations?

To feel comfortable with the position, do you need to conduct an employment status review on any individuals or seek specialist advice?

 

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Give yourself time to make and implement any changes needed ahead of 6 April 2020.

Including stage two which will be made available in the next issue of Employers Digest, our regular employment taxes newsletter.

Note: that any changes to off-payroll worker status may have an employment law impact as well as a tax and NIC implication, and so you should take all considerations into account.

Background on IR35 

HMRC believes the existing IR35 legislation "is not working effectively, and non-compliance is widespread". They estimate that only 10% of personal intermediaries that should apply the legislation actually do so. As a result, the government announced in the Autumn Budget 2018 that they will reform the off-payroll working rules (IR35) in the private sector. Under the new rules, the responsibility for operating the off-payroll working rules will move from individuals to the organisation, agency or other third party engaging the worker.

Broadly speaking, the reforms will require medium and large private sector businesses impacted to identify and review the employment status of all workers engaged through personal service intermediaries, including those workers provided via an agency or third party, and potentially treat them as a deemed employee for tax and NICs purposes from 6 April 2020.

What's next?

Importantly the steps involved in becoming compliant in this area are likely to mirror the 2017 reforms of off-payroll working in the public sector, and for many organisations these changes required sometime to implement.

Based on our experience, there are practical steps that you can take now with the knowledge that these new rules will take effect on 6 April 2020 and we will provide guidance on each of these over the next 12 months with you. 

Right now, you should consider:

  • informing yourself of the proposed changes. Further guidance can be found here and here. HMRC’s guidance on their preparatory steps to compliance was published on 15 April 2019
  • identifying all off-payroll workers currently engaged by your organisation
  • determining your organisation’s risk appetite in this respect as this will inform your subsequent steps in order to meet the following timeline.
 payroll timeline

*View Off-payroll working rules from April 2020 consultation.

Contact us

Caroline Harwood
Caroline Harwood
Partner, Head of Share Plans and Employment Tax
London