Following the announcement back in August 2019 that the new off-payroll worker rules will be introduced in April 2020, there has been a flurry of meetings and calls as clients seek to understand how the changes will impact them and their businesses.
Many questions are along similar lines and so we have listed some of the more common questions – and answers – below:
Q: Will the changes actually go ahead as planned?
A: Draft legislation has already been published and the IR35 changes are seen as a key part of HM Revenue & Customs’ (HMRC’s) anti-avoidance strategy, so we would expect the changes to be implemented irrespective of Brexit or any future review.
Q: We appear to be considered a small company under the legislation, is there anything further we need to do?
A: Essentially, no. However, we recommend that contractors engaged by you and potentially impacted by these rules are advised that you are a small company and therefore outside of the rules. This will avoid any confusion where the contractor assumes you are not small and ensures they understand the onus is still on them in considering their employment status, which means that that they would have to self-assess to determine whether the existing rules apply to their engagement.
Q: We are part of a complex group/have associated companies. Are we considered a small company under the legislation?
A: The general position for groups is that where the overall group is medium/large then all the connected entities will be caught by the new legislation. For joint ventures, the joint ventures and the joint venture itself are treated as a group for the purposes of this legislation.
The legislation will also aggregate the turnover of “connected persons” for the purposes of the small company test. For complex structures involving corporate members of limited liability partnerships (LLPs), companies trading in association and trusts it is recommended that specific advice is sought.
Q: With HMRC’s employment status tool due to be “improved” prior to April 2020, is there any merit in holding off on checking employment status until the new tool is available?
A: Our understanding is that the new tool (CEST) that recently relaunched is only an updated version, with some clearer wording and additional questions added. The fundamental flow chart process that it uses to reach a determination will be materially the same, so we are not expecting it to change answers in the majority of cases, but will hopefully reduce the number of cases where it was not able to provide a result. We still have concerns in certain roles/industries (eg film and TV production) that the tool will not be suitable for engagers even after the update.
The short answer is there is no real reason to delay identifying the ‘at risk’ contractors your organisation uses and start the discussion process off, albeit that you may want to review some cases again nearer the go live date.
Q: We’ve used HMRC’s CEST tool before but with limited results. Are we required to use this tool or can we consider other methods of determining the underlying employment status of our contractors?
A: The CEST tool is indeed optional, but it is the only tool where HMRC has stated it will stand by the outputs it produces (assuming they agree all the questions were answered correctly). However, in a few recent tax cases, HMRC has argued not to admit the CEST results as evidence, which does undermine the benefits of using the tool.
We are aware of a number of industries where the tool has been less than effective and companies have had to seek other solutions. There are a number of other online tools currently available, but some due diligence will need to be undertaken before relying on such an option, as the quality and output can differ. Engagers can, of course, undergo a manual/paper review themselves or seek the opinion of an employment tax specialist to support with this.
Q: One of our contractors is almost certainly caught, can we just reduce their rates by the employer’s National Insurance contributions (NICs) due, so our costs remain the same?
A: This is a complex issue and will often depend on the terms of the contract. Where there is no mechanism for such a recovery in the contract, you may need to consider amending the terms and conditions before the new rules come into place in April. The legislation applies to payments made after 6 April 2020 and will cover payments made under contracts that were already in place. Strictly, the employer NIC liability belongs to the engager and any contrived arrangements will be frowned upon by HMRC.
Q: Contractors are pushing back as to any proposed changes, not so much as to the reasons for our determination but in that this opens up their historic filing position to additional scrutiny from HMRC. What should we advise them?
A: HMRC has advised that they won’t be using the new changes as a basis for targeting personal service companies (PSCs) for IR35 reviews post-April 2020 for prior periods, unless they suspect fraud or criminal activity. We have seen HMRC start to open a few enquiries into contractors over the past few months, so we may start to see an increase prior to April 2020.
This is not part of the legislation though, and it’s entirely down to each contractor as to how far they trust HMRC as to the practicalities of such an approach. Ultimately if you have determined the contractor to be caught by the new rules then you have no alternative but follow the procedures in place from April 2020.
Q: If HMRC does consider we have made incorrect status determinations, who is responsible for the PAYE and NICs they will be pursuing?
A: In the first instance, HMRC will seek to collect the PAYE and NICs from the end client/engager. The end client may then be able to further recover the PAYE and employee NICs from the PSC in question, but not the employer NICs, unless the contract terms stipulate this. Any recovery will likely not include any corresponding interest or penalty charges.
There are some other processes where the end client can seek agreement from HMRC for the tax to be pursued directly from the worker, but these are outside the scope of this document. The main issue is that they will pursue the end client who had the initial obligation to account for the PAYE and NICs in the first instance.
Q: We have a contractor based overseas, do we need to consider the rules in respect of their engagement?
A: Providing they are non-resident and perform all their duties outside of the UK, then there is no requirement to account for PAYE and NICs. Where they live overseas but perform significant duties in the UK (the occasional trip to attend a project team meeting would in itself not be material) the rules would apply to this engagement.