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.
In a response to the COVID-19 situation, the government announced that the reforms extending the off-payroll working rules (IR35) to the private sector will be deferred by one year until 6 April 2021.
This move may be welcomed by many organisations who have been struggling with the challenges presented by the COVID-19 pandemic or for those who may have felt unprepared for the proposed changes. Many will now look to take their foot off of the IR35 planning pedal to focus on other issues.
On the other hand, some organisations who have spent a lot of time and money preparing for the changes, may feel frustrated.
However, the government have indicated that the IR35 changes will still be legislated for, meaning that they will definitely go ahead from April 2021. The only change to the draft IR35 legislation will be the commencement date for the new rules. This means that any time spent on preparing for the IR35 changes, and its impact on your organisation, remains time well spent.
If you have engaged with contractors about IR35, it will be necessary for you to communicate with contractors informing them what this deferral might mean for them. We would be happy to help you with this.
While the immediate pressure is off, the deferral means we should not now expect the rules to be applied with a soft touch in 12 months’ time, as was originally promised. Once the immediate issues presented by COVID-19 have lessened, you should use the additional time to make sure that you have a robust process in place for operating the new rules and be prepared for strict adherence to the new legislation. Many organisations have experienced how much preparation is needed to comply with the rules, so we recommend that steps are taken as early as possible to prepare for April 2021.
Finally on this point, HMRC will have likely trained large numbers of staff to deal with IR35 compliance in preparation for April 2020. Now that the changes are being deferred, it is likely that these individuals will be focusing on traditional employment status enquiries in the next year. The current rules already require you to assess the employment status for tax of individuals with whom you engage directly as freelance off-payroll workers. Therefore, it may be advisable to focus on the employment status of this group of workers over the next few months, and be prepared for greater scrutiny from HMRC.
If you need any assistance with the impact of the delay of the IR35 changes on your organisation, preparing for the changes in April 2021 or any employment status issues you have, please get in contact with the Employment Tax team at Crowe.
HMRC announced a change on 7 February 2020 in the way the new IR35 rules will work from 6 April 2020. Instead of applying the rules to all payments made from 6 April 2020 in respect of off-payroll workers who fall within the new rules, engagers will now only have to apply IR35 where relevant services have been provided from that date. This means that contracts completed before that date will now not be caught, somewhat reducing admin for engagers.
HMRC have also updated their internal guidance. We have outlined the main points to note from the updated guidance below.
A particular point of interest is the draft content on ‘recovery from other persons’, which is the provision that allows HMRC to collect the tax and National Insurance contribution (NICs) liability from other parties higher up in the contractual chain. This guidance goes further than the draft secondary legislation that was published a few weeks ago, and is probably the most detail we’ll get on how HMRC intends to use this power.
Basically HMRC have stated that where they are satisfied that there is no realistic prospect of recovering the tax, NIC and apprenticeship levy liabilities due from the fee payer/deemed employer, they may decide to recover the debt from other persons; this could be another agency higher up the chain (e.g. the agency the client contracts with) or the end client. They will not seek to pass the liability up the chain where there is a 'genuine business failure' and the person who should have initially paid it has not knowingly benefitted as a result of winding up without paying the tax liability. It is not clear how these tests will be applied and this is an area which should be monitored as we see the new rules operating in practice.
The other point of note, which has gone slightly under the radar, is the client-led disagreement process.
“Representations can be made at any time. However, the client is only required to respond to representations made during the course of the engagement and before the final chain payment is made in relation to that engagement. The client is not obliged to respond to representations made outside of this timeframe.”
The above paragraph limits the client’s requirement to respond to disagreements to only those made within the period of the engagement to which it relates. This is a slight change from what the draft primary legislation says, where no limit is specified.
This is all against the backdrop of the government review and a House of Lords committee inquiry into the extension of IR35 to the private sector that was launched on 7 January 2020. The review was due to complete in mid-February but the outcome has not been published at the date of writing. In addition, a House of Lords committee inquiry has also commenced. The Finance Bill Sub-Committee has made a deadline for submissions of written evidence for this inquiry of before 25 February 2020.
The inquiry will consider:
Lord Forsyth of Drumlean, Chair of the Lords Financial Bill Sub-Committee, said:
“We are interested in how this change will work in practice, and how it relates to wider changes in working arrangements. To inform our work we want to hear from as broad a range of people and organisations as possible”.
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:
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.
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.
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.
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:
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.
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:
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.
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:
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:
If the intermediary is a partnership, then one of the following conditions must be satisfied for IR35 to apply:
If the intermediary is an individual, the legislation will apply if:
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.
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.
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:
Unincorporated bodies only need to fail the turnover test to be 'not small' for these purposes.
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:
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:
It is important to note that:
Next month we will tell you more about how to do the relevant calculations and correct any errors.
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.
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’.
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.
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.
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.
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:
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?
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?
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.
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.
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:
*View Off-payroll working rules from April 2020 consultation.