Off-payroll working in the private sector

15 Nov 2018

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On Monday 29 October 2018, the Chancellor presented the 2018 Budget and announced that the intermediaries rules (commonly known as IR35) would be extended to cover the private sector, as had been hotly anticipated.

The changes, due to take effect from April 2020, are aimed at private sector businesses that contract the services of an individual through a Personal Service Company (PSC) and are expected to raise additional taxes of over £3 billion in the first four years.

According to the Budget release paperwork, “the UK’s 1.5 million smallest businesses will be exempt” as they will only initially target medium and large companies.

The sporting connection

It is quite common for a sportsperson to provide their contractual services through a limited company which would fall within the definition of a PSC. This may be for a variety of reasons including, but not limited to, the limitation of liability, anonymity or tax mitigation (and usually a combination of the above).

The majority of private sector sports businesses that contract with sportspersons would be likely to fall outside of the ‘smallest businesses’ exemption, so it would be wise for them to consider the changes where there is currently a PSC in place.

The current system

Where a private sector business makes payments to a PSC in return for the services of a sportsperson, the obligation to make the correct payments of PAYE and National Insurance to HM Revenue & Customs (HMRC) is the responsibility of the PSC, and not the private sector business that makes the initial payments.

In this regard, the private sector business can freely make gross payments to the PSC without any risk of interrogation from HMRC.

The changes

From April 2020, it will be the obligation of the initial payer (eg club, agency, sponsor, event operator etc) to ensure that the correct PAYE and National Insurance contributions are operated.

The aim of the legislation is to put more responsibility on larger businesses on the basis that they are more likely to understand the rules and operate the correct procedures. This brings private sector organisations in line with public sector bodies that have been affected by similar legislation brought in from April 2017.

PAYE and National Insurance will only be due on payments to the PSC, whereby, in the absence of the PSC, the individual sportsperson would be considered an ‘employee’ of the private sector business.

There are detailed rules surrounding whether a person would be considered an ‘employee’ of the business or not and this should be reviewed on a caseby-case basis. However, it is likely that in most cases a sportsperson would be considered self-employed rather than employed. In this situation, the private sector business can continue to make gross payments to the PSC.

The possible implications

Where a sportsperson would be considered an employee of the private sector business without the barrier of the PSC, the private sector business must operate income tax, employee’s National Insurance, employer’s National Insurance and an Apprenticeship Levy.

Typically, a sportsperson would pay income tax and potentially National Insurance already depending how they extract the funds from the PSC, however the private sector business will not have been required to pay any employer’s National Insurance contributions or the Apprenticeship Levy on the payments to the PSC. This would be an additional cost for the private sector business at 14.3% (13.8% employer’s National Insurance, 0.5% Apprenticeship Levy) of the total payments although a relatively small primary threshold will apply for National Insurance. If the new rules apply to a particular scenario, the payer in that scenario may be willing to pay less of a fee to take account of the additional cost.

What action to take

It is expected that many private sector businesses who currently make gross payments to PSCs in return for the services of a sportsperson will want to review the structure of the contracts they currently have in place.

HMRC is seeking to ensure that large businesses review their arrangements and, where appropriate, simply set up new arrangements whereby they treat the individual as an employee and withhold the necessary taxes and National Insurance contributions at source. This would result in big losses for both the payee and payer so we would recommend that professional advice is sought to review the arrangements.

In most instances, we would expect the sportsperson to be considered ‘self-employed’ and therefore there should be no change to the payments made between the private sector business and the PSC following the changes in April 2020. However, the private sector business will need to be satisfied that this is the case prior to that date if they are to reduce the risk of enquiries and possibly penalties from HMRC.

Further guidance on how the rules will affect businesses as well as the draft legislation will be released in the coming months. At that point, we will be able to provide advice in respect of prior contractual arrangements and how they might be affected, as well as arrangements going forward.

For advice regarding any of the issues raised here, please contact your usual Saffery Champness partner, or contact Pete Hackleton.

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