In April 2020 the “off-payroll working” rules which impacted the public sector in 2017 are due to be extended to the private sector.
Medium and large organisations in all sectors of the economy who contract with personal service companies (“PSCs”) for the provision of an individual’s services will be affected by the changes.
To help you understand these changes, we have set out below some FAQ answers which we hope you find helpful.
For the purposes of this resource, we will be referring to the organisation benefitting from the service as the “end user”, the limited company contractor as the “PSC” and the individual undertaking the work as the “individual”.
1. What are the off-payroll working rules?
While the underlying IR35 rules have not significantly changed since 2000 and remain in force, the off-payroll working rules are set to change on 6 April 2020 when certain criteria are met.
What this means in practice is that when an end user contracts with a PSC for the services of an individual, the end user will be responsible for assessing whether the arrangement is genuinely one of self-employment.
The objective behind this shift in responsibility is to crack down on individuals who are seeking to avoid PAYE by creating a PSC and (typically) paying themselves through dividends.
2. Will this affect contractual relationships with all PSCs?
No. If the PSC is well established with numerous employees and contracts, it would not be necessary to investigate the relationship between the end user and the individual. The relationship will only be an issue when the individual has a material interest in the PSC, for example one individual working on his own through his own PSC.
3. Will the off-payroll working rules apply to all end users?
No. Unlike the public sector, the off-payroll working rules will not be extended to all end users contracting with a PSC. Instead, they will only apply if at least two of the following criteria are met by the end user:
- Turnover exceeds £10.2 million;
- Balance sheet exceeds £5.1 million; or
- Average number of employees exceeds 50.
If an end user fulfils at least two of these criteria for two consecutive tax years, they will fall within the scope of the new off-payroll working rules. If not, the end user will be exempt under the small business exemption and the current IR35 compliance practices will continue.
4. Should the off-payroll working rules apply, what implications will they have?
The main implication will be the shift of responsibility of classifying an individual’s tax status from the intermediary (as it is currently) to the end user.
What this means is that when an end user is contracting services through an intermediary, it will become responsible for completing a “status determination statement” (“SDS”) to assess the individual’s status for tax purposes. This must be a specific, individualised test looking at the contract between the end user and the intermediary as well as the reality of the situation in practice. Looking into the arrangements in practice is particularly important, bearing in mind that the realities of the relationship between a contractor and an end-user often change with passage of time and the contractual documentation might therefore have become inaccurate.
If, having conducted the SDS, the end user deems the individual to be employed for tax purposes, they must inform them of their decision (which they have 45 days to appeal) and start implementing PAYE in the usual way.
5. When completing a status determination statement, what factors should be considered?
The main factors the end user must consider are:
- – Can only one person (the individual) undertake the work, or could they send someone else in their place? What actually happens in Personal service/substitutionpractice?
- Control – Which party determines how/when/where the work is done?
- Financial risk – Does the individual have any financial risk when undertaking the work and/or take out their own insurance?
- Mutuality of obligation – is the end user obligated to offer the contractor work and is the contractor obligated to undertake it if offered?
A non-exhaustive list of other factors to consider are:
- Integration into the organisation – Does the end user provide the individual with a work email/access card/desk?
- Equipment and benefits – Does the individual use their own equipment or is equipment provided by the end user?
- Previously an employee – Was the individual previously an employee of the end user?
- Contract length – how long is the contract between the end user and the PSC?
6. Should businesses be affected by the off-payroll rules, what steps should they be taking?
Although these changes are not due to be implemented until 6 April 2020, businesses must take steps prior to this to ensure compliance. This will involve undertaking SDSs for all continuing and new services provided through intermediaries to determine whether or not they remain/will be genuinely self-employed.
Liability for non-compliance with the new rules (which will involve unpaid taxes and non-compliance penalties) rests with the party that has failed to meet its obligations under the new rules. As the onus has shifted onto the end-user, urgent action is needed.
7. What should you do if you unsure how to prepare for these changes?
If having read this briefing note, you:
(a) remain unclear as to whether or not these changes will affect your business;
(b) need further guidance or assistance in completing SDSs; or
(c) need to prepare update consultancy agreements with your contractors;
we would be happy to help you prepare and account for the changes to off-payroll working. Please contact a member of the team and we would be happy to answer any questions.
Please bear in mind that while we are able to assist you in all of the above areas, we are not able to give tax advice, so would recommend that any advice we provide is given in conjunction with your business’ accountants.