The new rules will require private sector organisations which engage workers via a Personal Service Company (PSC) or other similar intermediary to undertake checks to determine whether the worker should be treated as an employee or as self-employed for tax purposes. If the tests indicate a relationship which is more akin to employment, it will be the client’s responsibility to operate PAYE and NIC on payments made to the PSC. Previously the onus to do so lay with the PSC but in HMRC’s view fewer than 10% of such organisations actually complied with their responsibilities, and estimate that the tax cost could be as much as £1.3 billion in 2023/24.
These rules already apply to engagers in the public sector but they also need to be aware of the changes brought in by the new rules which will apply to all medium and large organisations in the UK.
Four key areas have been subject to consultation and the announcements bring clarity if no surprises.
Only companies which are not 'small' as defined by the Companies Act 2006 will be subject to the new off payroll working rules. A small company must meet two of the following qualifying conditions:
1. Annual Turnover not more than £10.2 million
2. Balance sheet total not more than £5.1 million
3. Number of employees not more than 50.
If these are not met in two consecutive years the company will cease to be small and must apply the new off payroll working rules from the start of the tax year following the filing date when the company is no longer small.
For unincorporated organisations, HMRC has taken on board the need for a straightforward test and those organisations whose turnover exceeds £10.2 million in one calendar year must operate the off payroll working rules from the start of the following tax year. This will mean that unincorporated organisations will need to keep detailed records of turnover per calendar year, even if this differs from the period over which they draw up their accounts which will mean a further administrative burden.
HMRC have rejected proposals for tax and NIC relief for payments made by engagers into an offpayroll worker’s personal pension plan and no action will be taken to align the employment law definitions of status with those used for tax purposes citing the need for careful consideration in order to avoid unintended consequences. The story remains the same with regard to the “Check Employment Status for Tax” tool (CESTT) which is intended to help clients with their status determinations, but CEST still fails to win the confidence of its intended users, particularly in light of HMRC’s failure in recent tax tribunal cases to apply the status tests correctly.
Finally, HMRC promise that a programme of education and a support package will be released in Summer 2019. However we would encourage all organisations to take action now rather than to wait to evaluate the workforce and current policies, assess the level of risk and put procedures in place to ensure that they can comply with the new rules.
For more information please refer to Crowe’s ongoing support programme for those impacted by IR35 changes in the run up to April 2020.