Off-Payroll in the Private Sector - Guest Article by Ian Holloway

Payroll professionals will have heard the words IR35 and off-payroll working, however, do they really know what they mean?  It is essential that they do, as these will be words that will be commonplace come 2020.

IR35?

For information, the terminology IR35 is born from the fact that original initiative was the Inland Revenue’s 35^th press release of Budget 1999.

Since 2000, ‘intermediaries’ legislation’ has existed that was designed to counter tax avoidance.  Very simply, if a worker is an employee in all but name, Budget 1999 said that they should be paying Income Tax and National Insurance as if they were an employee.  In the original scope of IR35, where the worker was providing their services directly through their own intermediary, often a PSC (Personal Service Company), the original the person providing the services had an obligation to tell their engager.

Before the 2000 changes were enacted, the position was that the engager did not have to put them on payroll.  The responsibility remained with the PSC to decide if IR35 applied and calculate deemed income as part of their annual accounts.  There was no responsibility to tell the engager, as the engager had no right / need to know.

Off Payroll?

However, post 2000, if the IR35 rules applied, the engager had to put them on the payroll for tax and NICs.  Simply, the individual that was paid outside the payroll had to be put on the payroll – i.e. going from off-payroll to on-payroll.

In April 2017, the UK Government reformed the IR35 rules and moved the responsibility for determining employment status for tax from the worker’s PSC to the public authorities that engaged them.  The off-payroll of on-payroll responsibility was shifted.

To the Private Sector from 2020

At the Autumn Budget 2018, the UK Government announced that it would extend the public sector reform to all engagements in the public sector – for medium and large-sized organisations.  There followed a 12-week consultation starting 05 March 2019 with the intention that this off-payroll to on-payroll was effective April 2020.  This was to address four issues:

1. The scope of the reform and the definition of small business;
2. How to ensure parties in the labour supply chain have the information they need to comply with the reform
3. How HMRC should address non-compliance in the labour supply chain
4. How to address concerns about clients making blanket determinations and giving workers and fee-payers the power to challenge status determinations made by client organisations

On 11 July 2019, HMRC published its Summary of Responses, addressing the topics above.

This article covers who is in the scope of the reforms and the information requirements.

Who is in Scope?

Small companies outside the public sector will be exempt from the reforms.  A small company that is incorporated will have the Companies Act 2006 criteria applied to determine whether the fall into this category and are defined as meeting 2 of the following:

• Annual turnover not more than £10.2m
• Balance sheet total not more than £5.1m
• Not more than 50 employees (see the Companies Act 2006 that tells how this is measured in practice)

However, for unincorporated companies, a simpler test will apply.  An unincorporated company is one that is an organisation of people that operate for a reason other than to make a profit.  Therefore, this could be charities, voluntary groups or community groups.  For unincorporated clients the off-payroll rules will apply for the tax year following the calendar year in which turnover exceeds £10.2 million.  The two year rule will not apply, neither will the minimum employees (50) nor the balance sheet test.

Have a look at the Explanatory Note (Part 1) to the draft legislation (up to an including clause 61N) but be prepared for a complicated read.

The Information Requirements

The Consultation asked about requirements for passing on status information, particularly when there is a labour chain rather than a direct engagement

• The first option was a ‘cascade’ of the status for tax determination from engager / fee-payer to the worker
• The second option was a ‘simplified’ approach, with engager bypassing a supply chain and providing the determination directly to the worker. However, the responses indicated a number of problems with this, not least that the engager / fee-payer may not know the supply chain and, similarly, the worker may not know the end engager

The UK Government has legislated that the engager will be required to pass the determination and reasons for the determination down the contractual chain together, as well as passing them directly to the worker.

Have a look at the Explanatory Note (Part 1) to the draft legislation  (up to an including 61TA) but be prepared for a complicated read.

Undertaking the Assessment / Determination of Status

The engager will have to assess the employment status for tax (and National Insurance).  This can be done in a number of ways, for example using internal checklists or contract reviews, using commercial status tools or using HMRCs Check Employment Status for Tax (CEST) tool.

However, many people responding to the survey suggested that CEST needed an ‘overhaul’, was ‘complex’, gave ‘ambiguous’ outcomes and ‘did not accurately reflect current case law’.

Page 18 of the Responses document is particularly vague about addressing the vital issue of CEST and accurate and timely guidance:

‘On CEST, HMRC has been working to better understand the needs of organisations and to enhance the service. Enhancements will be tested with stakeholders and rolled out ahead of the reforms being introduced

The government is aware that organisations are already preparing for April 2020 and will offer continued guidance and support. The government recently published four steps that organisations can take now in order to prepare for the reform and will offer more support through its education and support package, which will be published in summer 2019’.

The Status Determination Statement

Readers should also note that they are required to issue off-payroll workers with a Status Determination Statement (SDS) – see the draft legislation section 61NA.  This is regardless of whether the off-payroll worker can remain off-payroll or has to be placed on the payroll.

The Statement needs to say that the engager has concluded that the following do or do not apply:

• If the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client or the holder of an office under the client, or
• The worker is an office-holder who holds that office under the client and the services relate to the office

(Note that all office holders (NEDs, directors, trustees etc) have been caught automatically by IR35 since 2013 and should on the payroll anyway)

The SDS also needs to contain the reasons for the conclusion.

• If the conclusion is they do apply – the off-payroll workers needs to go on the payroll
• If the conclusion is they do not apply – the off-payroll worker can remain off of the payroll

In reality, the obligation for a SDS would be met by the engager writing something much simpler along the lines of:

• We have concluded that you are caught by the intermediaries legislation and a withholding of tax and NI must be applied, or
• We have concluded that you are not caught, or
• We do not have to carry out the SDS as they are a small engager so you must make the assessment

Section 61T and 61TA of the draft legislation explain what to do in a disputes process and / or the obligation for the engager to withdraw the SDS if they cease to be medium or large.

To support, readers are well-advised to read the following:

• The off-payroll working rules from April 2020: Factsheet
• The Check Employment Status for Tax (CEST) service
• Apply the off-payroll working rules in the private sector guidance
• HMRC’s policy paper

My next article on this will look at how HMRC will address non-compliance and provide links to the guidance available at the time of writing.

 

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