What are the off-payroll working rules?
The fundamental premise of the off-payroll working rules is to address a mismatch in the tax treatment of amounts paid to an employee compared to the tax treatment if a company (or other intermediary) receives payment for that work.
With companies paying lower rates of tax than individuals, and with the payment of dividends from those companies not being subject to National Insurance Contributions (NICs), it is no surprise that these rules have been subject to exploitation.
HMRC have for some time been strengthening their position in terms of off-payroll working. In 2017 rules came into force which impacted businesses operating in the public sector. From 6 April 2020, further legislation will be introduced to address off-payroll working in the private sector.
As such from 6 April 2020, any business engaging a worker through a service company will need to consider whether the individual would be an employee if engaged directly, and, if so, operate PAYE and National Insurance.
What is changing?
Currently, if a private sector business engages a worker through an intermediary or through the worker’s personal service company (‘PSC’), responsibility for assessing whether that worker is an employee rests with the intermediary or the PSC and not the engaging business.
From 6 April 2020, all businesses who do not meet the criteria of ‘small’ (i.e. broadly, turnover of no more than £10.2 million, a balance sheet total of no more than £5.1 million and less than 50 employees) will need to consider whether workers and consultants are self-employed, or whether they are engaged on terms akin to that of an employee.
Deciding upon whether an off-payroll arrangement is akin to employment involves a review of the working practices and contracts of each individual engaged. HMRC have provided an online service at HMRC’s Check Employment Status for Tax service to help with this.
How could this impact your business?
If your worker/contractor relationships fall within the off-payroll working rules as employment, your business will be responsible for applying PAYE and National Insurance contributions to payments made to your workers. Whether the taxes of the worker will ultimately be a cost to your business or whether they will be borne by the individual, could depend upon what is agreed in the contract between you.
Without undertaking any necessary action, your PAYE/NICs bills as an engaging business are likely to increase, and you could face sizeable tax demands for any uncollected PAYE/NIC’s. This is very much considered to be a hot topic by HMRC. As such, increased numbers of PAYE/NICs visits are to be expected as HMRC bolster their resources to ensure compliance with the new rules.
What you need to do now to prepare!
- Consider how many people in your workforce are supplying their services to you as a contractor via ‘personal service companies’. Common services likely to be affected include IT consultancy and support, graphic designers, bookkeepers etc…
- You will need to review the working practices and contracts of your workers. Should they, on each specific engagement, be classed as employed or self-employed for tax purposes? You can refer to the HMRC’s Check Employment Status for Tax service to help with this.
- You will need to discuss the new rules with your current contractors to identify if the off-payroll rules apply to their role and to ensure they are aware of the changes. This may involve negotiating new terms and pricing which take the settlement of taxes into account.
- If you regularly use contractors in your business, you will need to prepare processes to ensure you know how these roles will be assessed in terms of the off-payroll rules and how their payments should be made. It may be worth appointing one individual within the business who will be responsible for determining the status of contractors and organising their payments.
- We also suggest that you implement a system of documenting and evidencing all decisions made. This would be of particular importance if HMRC perform a PAYE visit or launch an enquiry.
If contractors and consultants are part of your workforce, off-payroll working preparation needs to be on your agenda. If you have any questions about the new off-payroll working rules and/or IR35 please get in touch Joanne Powell or a member of our tax team.