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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.

10/10/2019
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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Step 4: HMRC publish initial draft guidance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 payments 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.
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*View Off-payroll working rules from April 2020 consultation.

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IR35: your journey to April 2020

How can you prepare for the changes to off-payroll working rules?
Join our breakfast event on 21 November 2019.

Contact us

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