The government has confirmed that changes to the off-payroll working rules for the private sector will go ahead from April 2021, following a delay due to the ongoing Coronavirus pandemic.
The rules, based on the changes in the public sector in April 2017, will make all engagers (other than those in the private sector considered ‘small’) responsible for determining whether the IR35 rules apply to the contractors they hire and ensuring the necessary PAYE and National Insurance contributions (NICs) are paid.
The legislation also includes provisions to ensure that all parties in the labour supply chain are aware of the engager’s decision and the reasons for that decision, and will introduce a statutory engager-led status disagreement process.
Scope of the reforms
The intermediaries legislation, more commonly known as IR35, was intended to prevent businesses and individuals avoiding the increased tax and NIC costs associated with employment by interposing an intermediary – generally a personal service company (PSC) – between an individual and the business they work for. The legislation is not intended to catch genuine self-employment, but the government has long been concerned that contractors are incorrectly categorising engagements as falling outside the IR35 rules, leading to a potentially substantial loss of tax and NIC.
Since April 2017, public sector bodies (as the ‘engager’) have been responsible for determining whether IR35 applies to an engagement. Where a contract is deemed to fall into IR35, the public sector body is responsible for deducting tax and NICs from payments to the contractor, unless there are other entities in the supply chain (in which case, in broad terms, the responsibility to make the deductions falls on the body making the payment to the PSC – known as the ‘fee payer’). For private sector contracts, the obligation to determine whether any contract falls within IR35 – and if so to make the necessary deductions – will, like in the public sector, fall on the engager for all services provided from April 2021 (even where the contract was in place prior to this date) unless the engager meets the definition of a small business.
Where the engager meets the definition of a small business, they will be exempt from the reforms, and where a contractor engages with a small business via their PSC, the PSC will retain responsibility for determining whether IR35 applies.
It is important to highlight that the rules will only apply to services provided after 6 April 2021, and not payments as originally advised by HM Revenue & Customs (HMRC).
Defining small businesses
The existing Companies Act definitions will be used to determine whether a business is small for the purposes of this legislation. The test currently requires a company to satisfy two of the following three conditions:
- An annual turnover of not more than £10.2 million;
- A balance sheet of not more than £5.1 million; and
- Not more than 50 employees.
Of course, it is not only incorporated businesses that engage contractors, and the draft legislation has determined that the turnover test only will apply in determining whether non-incorporated businesses are considered small.
There are also specific rules for joint ventures and groups of companies (the small definition only applies if all parties meet the definition).
Defining reasonable excuse
Guidance published on 7 February 2020 clarifies HMRC’s definition of ‘reasonable care’. Reasonable care means clients should act in a way that would be expected of a prudent and reasonable person in the client’s position. HMRC acknowledges that the circumstances of clients will vary greatly and therefore it has published examples of behaviour that reflects reasonable care, including:
- Accurately applying and keeping a record of the employment status principles.
- Accurately completing HMRC’s Check Employment Status for Tax (CEST) tool.
- Applying HMRC guidance on determining status.
- Seeking the advice of a qualified professional adviser.
- Having someone with a good understanding of the work to be undertaken involved in the determination process.
- Checking existing individual determinations to ensure they remain valid and accurate.
- Reviewing the processes being applied and amending these for future determinations where necessary.
- If there are any material changes to a worker’s terms and conditions, or working practices, making a new status determination.
- Checking and reviewing the processes of other parties where the determination process is subcontracted to another party. But the client remains responsible for the accuracy of the Status
- Determination Statement (SDS) even if it subcontracts that responsibility.
CEST and guidance
The implementation of the rules is totally reliant on engagers being able to correctly determine whether the IR35 rules will apply – by considering if the work would have been employment had the worker been engaged directly.
One of the main methods for determination for public sector contracts has been HMRC’s CEST tool.
HMRC has lost many of the IR35 cases taken to the tax tribunal since the start of 2018. The judgments in these cases have highlighted the potential complexity of making an accurate IR35 assessment. In less straightforward cases, such as those in the TV and radio industry, it requires a full assessment of a wide variety of factors, and it is likely to remain difficult to accurately reflect these in a tool designed to be straightforward for non-tax specialists to use. CEST may only provide a clear and reliable result in the most straightforward of cases.
Status Determination Statement (SDS)
A SDS should be issued by the public authority or medium and large private sector clients to determine whether the off-payroll working rules apply to an engagement from April 2021. The client should then communicate that decision, by way of the SDS, to the worker and any third party it contracts with. The legislation does not specify the format or method by which the SDS should be issued, but the client should ensure that the worker is knowingly able to receive or access it.
The SDS should be reconsidered with every change in terms and conditions or working practices.
Where labour is sourced through a third party, the SDS should be issued to the person contracted with for the worker’s services. If the SDS is not passed onto the third party contractor, the client remains liable. The SDS should be issued on or before payment is made. If payments are made before the SDS is issued, this will result in responsibility for tax, NICs and Apprenticeship Levy sitting with the person who hasn’t passed the SDS on.
Contracted out services
When services are contracted out, it could be difficult to determine who the client is and where responsibilities lie. Where a person enters into a contract with an intermediary for the supply of a worker, they will be the client, unless they are an intermediary themselves. If a contract is entered into for a fully contracted out service, they will not be the client. This is because the worker’s true client is the party who the work has been contracted out to; the ‘service provider’.
Whether a contract is for a fully contracted out service is a question of fact, based upon the commercial reality of the arrangements. The following should be considered when determining this position:
- The nature of the business;
- The nature of the service provider’s contract and relationship between the worker, the service provider and their customer.
HMRC has also issued guidance to bring in a ‘client-disagreement process’, which should be adopted and must follow the set-up guidance published by HMRC, as follows:
- Consider the worker’s and/or the deemed employer’s (ie agency) representations. These representations could be made verbally or in writing.
- Respond to the worker and/or the deemed employer’s representations within 45 days, beginning with the day the representations are received, not from when the SDS was issued.
- Inform the worker or deemed employer that they have considered their representations and that they have decided that their original SDS was correct and provide reasons; or
- Inform the worker and deemed employer they have considered representations and decided the original conclusion was wrong, provide a new SDS and state that the previous SDS is withdrawn.
- Take reasonable care in making any new SDS and ensuring it contains the reasons for reaching that conclusion.
Representations can still 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.
If the above minimum conditions are not met, the responsibility of payment to HMRC will revert back to the client.
Despite the delay, many businesses are not yet ready for the upcoming IR35 changes. Preparations made for the initial implementation due in April 2020 are out of date and may now not be at the forefront of people’s minds, with many dealing with the pandemic and furlough for example. We would therefore encourage an engaging business to now take the time to ready the business for the IR35 procedure.
For engaging businesses, this will mean that prior to 6 April 2021 they will need to have:
- Identified all individuals who may be impacted by the new rules.
- Determine whether or not a contract will fall within the IR35 rules.
- Put in place processes to ensure that these decisions are both made and communicated consistently going forwards.
- Engaged with all stakeholders, including individual contractors, about the tax and procedural changes going forwards.
- Reviewed their internal systems, such as payroll, finance and HR processes, to ensure that they can make the correct tax and NICs deduction from payments where required.
- Considered what processes need to be put in place to deal with the specific time limits for dispute resolution with the workers and how contractors will be dealt with post April 2021.
Contractors should also take this opportunity to consider whether an engager could reach a different conclusion on their status to their own.
If you would like any further information on this matter or wish to make a representation please contact your usual Saffery Champness partner.