Changes to the off-payroll working rules
The government has published for technical consultation draft legislation, to be inserted into the Finance Bill 2019/20, to implement the extension of the off-payroll working rules reforms to medium and large private sector businesses from 6 April 2020. It has also published explanatory notes to the draft legislation and its response to its March 2019 consultation on the rules. In doing so, it has confirmed that it will not delay the 6 April 2020 commencement date for implementing the private sector extension.
The extension will apply to engagements with medium or large-sized organisations in the private sector. It will shift responsibility for operating the off-payroll working rules from the individual’s personal service company (PSC) to the organisation or business that the individual is supplying their services to, regardless of whether that supply is direct or indirect. This includes responsibility for deciding whether the rules should apply and deducting the associated employment taxes and NI contributions. Engagements with small organisations outside the public sector are to be exempt – the existing IR35 rules for the private sector will continue to apply for small organisations. Provisions to allow for the transfer of liability and the transfer of information through labour supply chains will also be included. The measure will have effect for contracts entered into, or payments made, on or after 6 April 2020.
Generally, a company will qualify as a small company if it falls under the small companies regime under the Companies Act 2006, i.e. where two of the following criteria are satisfied:
- Number of employees – not more than 50
- Annual turnover – not more than £10.2 million
- Balance sheet total – not more than £5.1 million.
Unincorporated organisations will generally be regarded as small if their annual (calendar year) turnover does not exceed £10.2 million.
The medium or large-sized organisation outside the public sector that engages the individual through their own PSC will become responsible for determining whether deemed employment status for tax applies, communicating that status determination statement and the reasons to the relevant parties in the supply chain and responding to disputes over the determination within set timescales (by implementing a status disagreement process). The draft legislation will then operate so that where the determination is one of deemed employment status for tax:
- The party paying the worker’s PSC (the “fee-payer”) is treated as an employer for the purposes of Income Tax and Class 1 NICs
- The amount paid to the worker’s intermediary for the worker’s services is deemed to be a payment of employment income, or of earnings for Class 1 NICs, for that worker
- The party paying the worker’s intermediary (the “fee-payer”) is liable for secondary Class 1 NICs and must deduct income tax and NICs from the payments they make to the worker’s intermediary in respect of the services of the worker
- The person deemed to be the employer for tax purposes is then obliged to remit the payments to HMRC and to send HMRC information about the payments using Real Time Information (RTI).
Medium and large-sized organisations hiring the services of ostensibly self-employed contractors should prepare now for these forthcoming changes, e.g. by auditing their arrangements with such individuals, determining contractors’ deemed employment status and changing systems/contracts to enable that determination to be communicated externally to the relevant parties in the supply chain and to facilitate the deduction and payment of Income Tax and NICs to HMRC.
The government has committed to having the enhanced HMRC Check Employment Status for Tax (CEST) service in place before April 2020.
The technical consultation on the draft clauses closes on 5 September 2019 and then the Finance Bill 2019/20 will be introduced into Parliament following the autumn Budget.