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HMRC pushes ahead with the April 2020 IR35 changes in the United Kingdom

  • Northern Ireland

    07-08-2019

    HMRC has confirmed that it will not delay the 6 April 2020 commencement date for implementing changes to the off-payroll working rules for the public sector and extending such rules to medium and large private sector businesses, and has published further details including draft legislation.

    Businesses hiring the services of ostensibly self-employed contractors should prepare now, for example, by auditing these arrangements, determining contractors’ deemed employment status and changing systems and contracts to enable that determination to be communicated externally and, where applicable, to facilitate the deduction and payment of income tax and employee’s and employer’s National Insurance contributions (“employment taxes”) to HMRC.

    The existing IR35 rules for the private sector will continue to apply for small organisations.

    Background

    There has been growth in people working through their own personal services company (“PSC”) to provide self-employed contracting services to businesses. The Government believes that many of these workers are not genuinely operating on a self-employed basis and more should be paying higher taxes, as if they were an employee, under the off-payroll, or IR35, rules.

    It is therefore changing the way these rules apply in the private sector by making medium and large organisations more accountable for IR35 compliance, including in their labour supply chains. For further information on the background to IR35 and these changes, read the Eversheds Sutherland briefing.

    New HMRC information on key aspects of the changes

    From April 2020, a medium or large business which engages a worker through a PSC either directly or indirectly (the “client”) will become responsible for determining whether deemed employment status applies, communicating that determination and the reasons to the relevant parties in the supply chain and responding to disputes over the determination within set timescales. When the determination is one of deemed employment status, the new rules make the person that pays the PSC (the “fee payer”), which could be the client if they contract directly with the PSC, responsible for deducting and paying the employment taxes and apprenticeship levy to HMRC. However, importantly the liability for employment taxes may transfer to the client or other parties in the supply chain in certain situations.

    HMRC has recently published draft legislation to implement these changes, together with its response to a consultation which closed in May this year. Both provide further information on how the rules will work from 2020 for both the private and public sector, which include as follows:

    • the client must decide whether the worker would be an employee if the business contracted directly with him/her and exercise reasonable care in reaching this decision;
    • the client must provide a status determination statement (“SDS”), setting out whether or not deemed employment applies and the reason they have reached this determination, to the party that it contracts with for the supply of the worker (the PSC or the contracted agency or other labour provider) and the worker;
    • until the client issues the SDS to the worker, the client is liable for operating PAYE where deemed employment status applies. The client will also be liable for operating PAYE if it does not issue an SDS to the person it contracts with for the supply of the worker. This will incentivise clients to provide the SDS before entering into a contract or work commences;
    • the client must comply with a “status disagreement process” if either the worker or deemed employer disagrees with the SDS. Within 45 days, the client must re-confirm its SDS explaining why, or, withdraw the SDS and issue a replacement, together with reasons. A failure to comply with this process will render the client liable for deducting and paying employment taxes to HMRC (exceptions however exist in respect of fraudulent information being provided). This means that clients will need to have visible and effective complaints procedures or risk falling foul of the 45 day deadline;
    • if the new IR35 rules apply and the client is responsible for paying the PSC directly, it must deduct tax and NIC from payments it makes to the PSC and make payment to HMRC, together with any employer NICs and the apprenticeship levy.

     Each additional party in the labour supply chain is also responsible for:

    • cascading down to the next party the client’s SDS; and
    • where it is the fee payer, it must deduct and pay the relevant employment taxes to HMRC.

    HMRC has confirmed that private sector small companies, small groups of companies or certain small non-corporates* will be exempt from the changes meaning that the PSC will remain responsible for determining if the IR35 rules apply and paying the employment taxes to HMRC. HMRC has also clarified that a time lag will apply, should a client cease to be small, with the new IR35 rules applying from the start of the next tax year. The client must also tell the worker and deemed employer (if applicable) prior to the start of the next tax year if it ceases to be a medium or large organisation or risk being treated as a medium or large organisation and being liable for deducting and paying the employment taxes to HMRC, and potential worker disputes, in the event of non-compliance.

    * 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 are satisfied:

    Annual turnover – not more than £10.2 million

    • Balance sheet total – not more than £5.1 million
    • Number of employees – not more than 50

    Unincorporated organisations will generally be regarded as small if their an annual turnover does not exceed £10.2 million.

    Liability for tax payments

    The draft legislation transfers liability for deducting and paying employment taxes to HMRC for non-compliance with the rules and also paves the way for amended PAYE regulations to enable HMRC to recover unpaid tax from parties other than simply the fee-payer. While the final details are not yet available (as the proposed amendments to the PAYE regulations have not yet been published), we know that:

    • if the client fails to provide a compliant SDS (including exercising reasonable care in determining the status of the worker) to the worker and contracting party or fails to comply with the status disagreement process it will become liable for deducting and paying the employment taxes to HMRC;
    • if an additional party in the supply chain fails to cascade the SDS to the next party in the supply chain, it will become liable for deducting and paying the employment taxes to HMRC until it fulfils its obligations.

    When the proposed amendments to the PAYE regulations are published we anticipate that they will give HMRC the power to recover unpaid employment taxes from others in the supply chain, such as the first agency at the top of the chain or the client, where the person responsible for making such payments fails to do so.

    The practical outcome is that both the client and the first agency they contract with are incentivised to ensure compliant behaviour from the parties in the supply chain below, for example, by only choosing to engage with reputable businesses with a strong financial covenant. While indemnities may alleviate some of these risks, they are only of value if the party will remain a going concern with sufficient funds to pay, should the indemnity be enforced.

    In response to concerns that responsible clients or first agencies could unfairly be pursued for tax liabilities, despite having conducted due diligence on their supply chains, HMRC will issue further guidance on when it will not seek unpaid liabilities. Until this and the PAYE amendments are published, the final position on liability remains unclear. There is also no guarantee of a consistent approach to enforcement.

    Government guidance and tools

    HMRC is promising to publish further guidance this year, including on how a client can fulfil its obligation to take reasonable care and how it might implement the status disagreement process. It has also committed to having the enhanced HMRC Check Employment Status for Tax (CEST) service in place before next April.

    How should private sector organisations prepare now?

    The Government has, to date, outlined four preparatory steps (here). In addition, organisations should consider the following:

    • Act now - existing agreements with contractors and agencies will likely have notice periods which will add lead times to your April 2020 preparations. Put in place a strategy, appropriate processes and communicate the changes to the IR35 rules to affected parties as early as possible. What contingencies do you have in place if workers were to object/leave?;
    • audit the current use of off-payroll workers and seek to establish the length and complexity of PSC supply chains;
    • check your contractual terms. How should and can current contracts be changed or even terminated? Think about adding indemnities as a fall back. What additional due diligence steps might you want to introduce?
    • review the business case for continuing to use PSC contractors and whether to redesign contractor roles and responsibilities and labour supply models;
    • budget for potentially increased costs;
    • collate information internally (or externally) from which to make an IR35 status determination;
    • be consistent in approach but also beware of adopting an unjustifiable blanket policy;
    • train relevant employees in making IR35 status determinations;
    • review known parties in the supply chain providers - is the supply chain comprised of reputable and compliant parties?;
    • think about GDPR. Are your policies, privacy notices, etc., still appropriate to facilitate the lawful collation, use and sharing of information? Are reciprocal arrangements in place with suppliers?
    • prepare procurement, invoicing and payroll systems and processes for the new PAYE and NICs liabilities, as appropriate (if the fee payer), ensuring PAYE and other administrative process (VAT payments) are reconciled;
    • revise recruitment processes, including on-boarding, information sharing, etc., to demonstrate IR35 compliance;
    • explain to staff the importance of getting contractor engagement and management right to ensure information relevant to status determination is recognised and shared;
    • put in place a status disagreement process meeting HMRC’s requirements. Do your contractual terms include a dispute resolution process already and is it clearly communicated to agencies and contractors? Think about how to avoid inadvertently breaching the 45 day deadline for responding to status disagreements. Consider drafting a suite of template letters.

    Disclaimer

    This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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