After postponements in 2019 and 2020, the 6 April 2021 is the third date scheduled for the off-payroll working rules to be extended to the private sector. The purpose of the change is to increase compliance with tax rules known as IR35. This change has implications for:
- medium and large private sector organisations using contractors and freelancers;
- contractors and freelancers who provide their services through an intermediary, such as a personal services company; and
- agencies supplying contractors who provide their services through an intermediary.
Medium and large private sector organisations using contractors and freelancers who provide their services through an intermediary such as a personal services company, will be responsible for assessing the individual’s tax status under the off-payroll working rules.
The vexed issue of employment status, namely whether an individual is self-employed or a ‘disguised employee’ is at the crux of these rules. Correctly working out an individual’s employment status is crucial not just for tax purposes, but also because an individual’s employment status determines their rights at work.
Despite helpful guidance from the Supreme Court in its recent judgment in Aslam v Uber  on how to approach determining employment status, the law in this area is hard to navigate. Over the years, a number of inquiries and reviews have looked into reforming it. Most recently, the 2017 Good Work: The Taylor review of modern working practices addressed the difficulty faced by the legal framework in accommodating new forms of work like the gig economy. However, changes are yet to reach the statute books.
Assessment of Tax Status
To assess status, tax law uses similar principles to those used in employment case law. Having said that, tax status does not determine employment status; an individual may be taxed as self-employed but still have the benefit of employment rights.
For tax purposes there are only two categories, while under employment law there are three categories:
|Tax Categories||Employment law categories|
We will look at the Supreme Court the issue of employment status in more detail next month.
What are the IR35 Rules?
The IR35 rules are designed to crack down on what HMRC perceived as tax avoidance where a contractor provides their services through an intermediary to a client.
If the working arrangements are effectively those of employer and employee, instead of paying themselves in the most tax-efficient way, typically through dividends, the individual should be taxed as an employee.
What is changing in April?
The new rules shift the responsibility from the personal services company to the end client to assess the individual’s tax status. Organisations can rely on the findings of HMRC’s online tool, Check Employment Status for Tax (CEST), so long as the information inputted is accurate and up to date. However, CEST may give an ‘undetermined’ outcome for more complex cases.
The client must take reasonable care in reaching its decision and must:
- provide the contractor with a status determination statement explaining their decision; and
- put in place a process to deal with a disagreement over status, to allow the individual and any agency involved to challenge the decision.
If the individual is deemed to be an employee, the client (or the agency if an agency is involved and it pays the fees for the work to the personal services company) has to:
- deduct tax and national insurance (NI) through PAYE;
- pay employer’s NI contributions; and
- pay any apprenticeship levy.
Exemptions for Small Businesses
The rules will apply only to medium and large organisations. Small businesses are exempt. A company is always classed as small during its first year of business and after that, where it meets two of the following three conditions over two consecutive financial years:
- annual turnover of not more than £10.2 million;
- balance sheet total of not more than £5.1 million; and
- not more than 50 employees.
The current rules will continue to apply to small businesses.
How we can help
Getting the application of the off-payroll working rules wrong could have significant financial consequences which include HMRC claiming PAYE tax, NI contributions, late payment fines and interest from your business, potentially with no way to recover these from the personal services company. HMRC can also charge penalties of up to 100 per cent of the initial liability.
On the other hand, an overly cautious approach could result in losing a competitive advantage as contractors may be put off engaging with your business.
We can help determine the status of individuals working for you to ensure that there are no hidden liabilities among your workforce.
We can review your contracts and practices to advise you on how to best protect your business in light of the new Rules.