Extension of the off payroll rules into the private sector
The IR35 rules in the private sector are changing with the new off payroll rules coming into effect from April 2021.
In brief the IR35 rules apply where an individual works through an intermediary, such as a personal services company, and provides their services to an end user client. If that intermediary did not exist, but the individual looked like an employee of the client for tax purposes, then that assignment is deemed to be ‘inside IR35’ and the individual’s pay should be subject to PAYE tax and national insurance. Employers’ national insurance will also be due.
Due to non-compliance, the Government changed the application of the IR35 rules in the public sector in April 2017 – these are known as the ‘off payroll rules’. The Government believes the time is now right to extend the off-payroll rules into the private sector and has published its consultation on the detail. That consultation closed on 28 May 2019 and draft legislation is expected in summer 2019. The off payroll rules will then apply in the private sector from April 2021.
Don’t be tempted by tax avoidance schemes, including those that claim to ensure that you are not affected by the off-payroll working rules or that otherwise offer to increase your take home pay. If something looks too good to be true, it probably is. For more information, read Tax avoidance schemes aimed at contractors and agency workers.
The off payroll rules from April 2021
The off payroll rules which currently apply in the public sector will also apply in the private sector, albeit with some changes.
Small companies exemption
Importantly the off-payroll rules will not apply where the end user client is a small company, as defined in the Companies Act 2006 (CA 2006). Companies in small groups (as defined in CA 2006) will also be exempt. The Government are consulting on which tests to apply for non-corporate entities and have suggested two options (page 8 of the consultation document).
Where organisations are exempt, the existing IR35 rules (where the intermediary is responsible for applying the rules) will continue to apply. Finally when an organisation becomes or ceases to be small in an accounting period, for the purposes of the off payroll rules that change will apply from the start of the tax year following the end of that accounting period, irrespective of whether the organisation is incorporated or unincorporated. It is not clear from the consultation how a recruitment business is meant to establish whether its client is a small company or not, and therefore which rules apply.
A company which meets two or more of the following criteria
- annual turnover of not more than £10.2 million,
- balance sheet total of not more than £5.1 million or
- no more than 50 employees.
Passing status decisions through the supply chain
End user clients will have to assess the IR35 status of each assignment where the services are provided by an individual working through an intermediary. Under the reforms, they will have to pass that decision and their reasons for coming to that decision, to the off payroll worker as well as the party they contract with (usually the recruitment business). Given that some supply chains can be lengthy and complex the consultation asks some questions about how to simplify the information flow.
Check employment status for tax tool (CEST)
The end user client will have to understand the IR35 rules and use an appropriate assessment tool to reach an accurate status decision. In 2017 the Government introduced CEST online tool. CEST has come in for some criticism and the Government has committed to working with stakeholders to enhance the tool. GENIUS will work with HMRC on this.
Resolving disagreements over status
Off-payroll workers will have a right to receive the status decision, and the reasons behind it, directly from the end user client. In addition, the consultation proposes a client-led status disagreement process to help resolve disagreements about the status decision reached. It is proposed that a minimum set of requirements will be set out in the legislation.
There are a couple of different points to consider. Firstly, where the fee-payer is off shore, the fee-payer’s responsibilities move up the supply chain to the next UK based entity. Secondly, the Government proposes that the liability should initially rest with the party that has failed to fulfil its obligations until such time as it does meet its obligations at which point liability moves down the chain. However if HMRC are unable to collect the outstanding tax liability from a party, the consultation proposes that the liability should transfer back to the first party or agency in the chain, and if that fails, then HMRC will pursue the client. The consultation does not propose personal liability for directors, office holders or associates of the fee-payer.
All of these raise separate issues which we will explore with members in the coming weeks and address in our consultation response.
Clients should start to assess whether they will be affected or exempt from the off payroll rules, because they are a small company. Those who will be affected should start to assess who amongst their contractor population might be affected by this change. They must also identify who within their organisation should make the status decisions and ensure that those individuals understand how to asses status. Agencies will have to ensure that they have the payroll capabilities to manage payments to contractors (we understand from the public sector roll out that this is far from straightforward and some agencies have incurred significant development costs).
For further information contact the Genius Money team who can organise a time to visit.
The information contained in this page is provided as general background information and should not be taken as legal advice.
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