Off-Payroll in the Private Sector #2 - Guest article by Ian Holloway
Off-payroll / IR35 is coming to the private sector from April 2020. In the first article, I looked at the definitions of these terms and outlined who is within the scope of these reforms, and the information requirements for those companies within scope.
In this second article, I will again be looking at HMRC’s July 2019 Summary of Responses and draft legislation but focusing on how HMRC will address non-compliance in the labour chain and how they addressed concerns about clients making blanket determinations – i.e. a one-size fits all approach. As before, I will be pointing to the draft legislation and guidance that employers will find useful.
This section of the consultation sought views on the transfer of liability proposals which aim to reduce non-compliance in labour supply chains, i.e. engagers trying to get out of their determination of status and tax and NICs obligations by transferring a liability elsewhere in the supply chain.
The proposed option in the Consultation was for the first party in the supply chain to be liable, before moving the liability down the supply chain if there is still non-compliance. Essentially, rather than applying a penalty regime for non-compliance, the intention was to ensure that the ultimate engager of services took responsibility for assessing employment status rather than passing the obligation down the supply chain.
The Responses document suggests that the majority of respondents agreed that the first agency in a supply chain has enough visibility of the chain and is in a position to ensure compliance. So, the proposal is adopted in legislation with liability passing down the supply chain where there is non-compliance.
The ‘transfer of liability across the labour supply chain’ looks horrific on page 14 of the Responses document.
Have a look at the Explanatory Note (Part 3) to the draft legislation (also Part 3). Maybe this is less of a complicated read.
This is where an organisation makes a determination that all off-payroll workers are to be treated the same and placed on the payroll for tax and NICs.
In its Response, HMRC says that there is no evidence that this is happening in the public sector. Therefore, it has no reasons to believe that it will happen in the private sector. Status determinations should be on a case-by-case basis. Although, it may be relevant that certain group of workers in an organisation could be subject to a blanket determination – where the role, working practices and contractual conditions are the same.
Employers should be concerned about blanket determinations. Just because the role looks the same, it is the incumbent’s situation that is the primary concern and whether they are ‘caught’ by the off-payroll rules.
Perhaps worrying is the statement:
‘The vast majority of medium and large-sized organisations will have HR or procurement functions that will be able to make employment status determinations for those engaged through PSCs’
I do not believe this at all and the concern is that an employer will regard a ‘procurement function’ as an outsourced payroll services provider who will be doing the determinations for them. That should not be happening. Determining whether the off-payroll rules apply is an engager responsibility.
Perhaps comforting, therefore, is that pending guidance will set out how a client can fulfil its obligation to take reasonable care and how it might implement a status determination disagreement process. Also, the statement:
‘The government believes the client remains the party best able to understand the contractual terms and the expected working practices of those it chooses to engage, and to respond to any concerns or disagreements in real time.’
The draft legislation was open for comment until 05 September 2019 and will be included in the Finance Bill 2020, effective 06 April 2020.
It is worthwhile noting a couple of other comments from the Responses document:
Page 18 Relief on Pension Contributions
‘Given the prevailing view of respondents that there would be little take-up of the option to make tax and NICs relief available where fee-payers to pay into private pensions, the government will not proceed with this proposal at this time. However, encouraging pensions saving remains a priority, and the government will monitor any further responses on this point during the consultation on the draft Finance Bill.’
I am not sure that respondents would have mentioned NICs relief on pension contributions. However, this comment is about the concern that a PSC caught by the off-payroll rules could avoid liability by entering into an agreement that the fee would be paid to a private pension.
Page 18 Employment Rights
‘On employment rights, at present there is no direct link between employment status for rights and employment status for tax. As set out in the Good Work Plan published in December 2018, the government agrees with Matthew Taylor’s view in his review of modern working practices that aligning employment status for tax and rights is the right ambition. However, as Matthew Taylor recognised, this is not straightforward and any changes will need careful consideration to avoid unintended consequences.’
Therefore, what the Government is saying is that they will pursue the tax and NICs from off-payroll workers who have to go on payroll. Then, if the worker has an issue about their employment status they can take their case to the Employment Tribunal (in Great Britain) or the Industrial Tribunal (in Northern Ireland).
That will be a tricky one for employers.
I hope that you have found both articles useful and informative, to conclude is a summary and pointers to guidance that is available to support you.
Where the engager (employer) is in scope of the legislation from April 2020, they have a duty to assess their workforce. Where a worker is ‘caught’ by the off-payroll rules, they need to be placed on the payroll.
This is a massive obligation on employers (aka engagers or fee-payers). Putting an off-payroll worker on the payroll means the collection and reporting of the following on ‘deemed earnings’:
However, there are no employment or pension rights so:
- No holiday leave or pay
- No Statutory Payments
- No workplace pensions enrolment obligations
- No requirement to pay at the National Minimum Wage and
- No Student Loan deductions
Real Time Information
The Full Payment Submission (FPS) will be amended so that new off-payroll workers from 2020/21 will be flagged as such to HMRC. As well as suppressing Student Loan notices from HMRC, possibly this will be used by software developers to suppress the above employment and pension rights.
Guidance and Information
All in one place:
- HMRC’s policy paper
- HMRC’s Responses Document
- The draft legislation in the Finance Bill
- The explanatory note to the legislation
- The off-payroll working rules from April 2020: Factsheet
- Understanding off-payroll working
- The Check Employment Status for Tax (CEST) service
- Apply the off-payroll working rules in the private sector guidance
- How to calculate the deemed employment payment guidance
- Apply the off-payroll working rules in the public sector guidance
- Off-payroll working for agencies guidance
- Off-payroll working for clients guidance (preparing) and guidance (when to apply the rules)
Action – Look at your Workforce
This is a significant change, although it will not apply to all engagers.
Remember too that the off-payroll rules apply to subcontractors who may have been paying tax via the Construction Industry Scheme (CIS). The off-payroll rules override CIS with the result that the worker will pay Income Tax via PAYE and NICs.
The best advice is to read all of the above guidance and information and conduct a review of your contingent workforce. It could be that there are no off-payroll workers that need to go on-payroll.
Or it could be the opposite.
Remember that this article is based upon the information available at the time of writing. Look out for more guidance or changes to guidance as 06 April 2020 approaches.
Ian has been in the payroll profession for over 30 years, processing payrolls from all sectors, large and small. He moved from hands-on exposure in 2011 to become involved in educating the profession. His wide-ranging experience and up-to-date knowledge ensured he was able to impart this information to UK professionals through course material, social media, newsletters and face-to-face presentations.
Today Ian combines both these and is involved with a vital aspect of the payroll environment, that of working with the software that actually does a lot of the hard work for the profession. He is thrilled to be the Head of Legislation and Compliance at Cintra HR and Payroll Services, who constantly demonstrate their commitment to quality and compliant payroll and HR software, support and payroll services.
Ian approaches education and communication very much from the perspective of how this will impact the software, the employer and the worker. So, whilst the legislation is vital, compliance and effective communication are paramount.
LinkedIn – https://www.linkedin.com/in/ian-holloway-5959121a/
Cintra – www.cintra.co.uk