EXTENSION OF THE OFF-PAYROLL RULES INTO THE PRIVATE SECTOR IN APRIL 2020
The Government is extending the off-payroll rules, which have applied in the public sector since April 2017, into the private sector. The new rules will apply to work done by contractors working through intermediaries such as personal service companies. Importantly, the tests for IR35 status are not changing but the responsibilities for making the IR35 status decision and related deductions are. When: The new rules will apply to all payments made to personal service companies on or after 6 April 2020.
WHAT'S THE DIFFERENCE?
From 6 April 2020, the client, and not the contractor, will be responsible for assessing IR35 status. For inside IR35 assignments, the fee-payer will have to make tax and national insurance deductions before paying the personal service company.
WHAT IS HAPPENING AND WHEN?
Small companies exemption – small companies will be exempt from the changes. A small company is one which meets two or more of the following criteria (a) annual turnover of not more than £10.2 million, (b) balance sheet total of not more than £5.1 million or (c) no more than 50 employees. Companies in groups and joint ventures will be exempt provided all of the group companies or joint venture partners are small. Unincorporated organisations with a turnover of less than £10.2 million will also be exempt. Where organisations are exempt, the existing IR35 rules (where the intermediary is responsible for applying the rules) will continue to apply. When an organisation becomes or ceases to be small in an accounting period, for the purposes of the offpayroll rules that change will apply from the start of the tax year following the end of that accounting period, irrespective of whether the organisation is incorporated or unincorporated.
There will be anti-avoidance rules to prevent organisations restructuring so as to avoid the rules. Making the tax status decision – the client will have to understand the IR35 rules and use an appropriate assessment tool to reach an accurate IR35 status decision (called a status determination statement (SDS)). In 2017 the Government introduced the Check employment status for tax (CEST) which is an online tool. CEST has come in for significant criticism and the Government has been working to enhance the tool. HMRC have said that they will stand by CEST outcomes provided the information inputted is accurate. Importantly, CEST is not mandatory and clients can use any assessment method they wish – however at all times the client must use ‘reasonable care’ in making its tax status assessment. So, clients should not make blanket decisions such as ‘all contractors are inside IR35’ or ‘all contractors are outside IR35’.
If a client does not take reasonable care in making its decision it will be liable for unpaid tax and national insurance. Agencies should make not tax status decisions for the clients. If a client does not have internal expertise to make these decisions, they could use an established IR35 external reviewer to help them. Be wary of contract reviewers who say they can “get an assignment outside IR35” simply by adding an unrestricted substitution clause to a contract. Courts look at the reality of the engagement rather than just the contractual documentation. An ability to substitute by itself will not get an assignment outside IR35 if all other circumstances point to inside IR35.
From 6 April 2020 the off-payroll rules will apply to all public authorities, medium and large companies and organisations with a turnover of more than £10.2 million.
Passing status decisions through the supply chain – having made the tax status decision, the client will have to pass that decision, together with the reasons for that decision to both the party they contract with (usually the recruitment business) and the contractor (including where the client does not have a contract with the contractor). Each party has to pass the decision down until it reaches the fee-payer i.e. the party next to the intermediary in the supply chain. Resolving disagreements over status – the end user client must set up a client-led status disagreement process to help resolve disagreements about the status decision reached. The client must respond within 45 days of receiving a query and must: (a) confirm that it has considered the representations made and decided that its SDS is correct, and give the reasons for that decision; or (b) give a new SDS containing a different conclusion and state that the previous SDS is withdrawn. If the client does not respond within 45 days it will become the fee-payer. REC advises its agency members not to substitute its own or a contractor’s view on status where this conflicts with the client’s decision. Liability – we are still waiting for draft transfer of liability legislation.
In the meantime the proposals are that where the fee-payer is off-shore its responsibilities move up the supply chain to the next UK based entity. It is also proposed that liability should rest with a party that has failed to fulfil its obligations until such time as it does meet its obligations at which point liability moves down the chain. However if HMRC are unable to collect the outstanding tax liability from a party, the consultation proposes that the liability should transfer back to the first party or agency in the chain, and if that fails, then HMRC will pursue the client. It is not appropriate for a client to ask an agency to indemnify it if the client does not do what it is required to do under the legislation.