Tuesday 5 March 2019 saw the publication of the consultation document ‘Off-payroll working rules from April 2020’ - the consultation is the next step in the process to extend the IR35 reforms to the private sector.
The consultation largely includes aspects that were widely anticipated, such as using the existing Public Bodies legislation and promoting the use of the Check Employment Status for Tax tool (CEST). The document also proposes adding elements that appear to have arisen from the responses received by the Government when it reviewed the effectiveness of the Public Bodies reform rules and how they could be applied to the private sector. However, some of the questions asked suggest a lack of deep understanding of the temporary labour market and perhaps even focusing on the wider anti-avoidance measures sought by HMRC. For example, while the Government again acknowledges the complexity added by the differences in employment and tax law, it makes clear that the proposals are about implementing the employment status tax rules as they stand rather than a new simplified regime that many had hoped for.
As expected, draft legislation to implement these changes will be issued in the summer of 2019 as part of draft Finance Bill 2019. Although this is now the standard legislative process, it does reduce the time available for affected parties to fully understand their respective obligations, identify suitable measures and procedures, introduce any changes necessary and remain commercially viable.
What are the headline proposals for off-payroll workers?
As with the IR35 Public Sector reforms, the changes will affect businesses that engage workers through Personal Service Companies (PSCs), or any other intermediary such as a partnership or LLP. This is because the new rules will require the private sector organisation to assess if the intermediaries rules (IR35) apply to the contracts it enters into with any PSCs, whether hired directly or via third parties.
Where the engager determines IR35 applies, the person or business paying the PSC (the fee payer) must apply PAYE and NIC deductions to the payment for the worker services: in other words, treat the worker as a deemed employee for tax purposes. In addition, the fee payer must also account for employer’s NIC and, potentially, the Apprenticeship Levy.
The proposed rules suggest introducing a requirement on the engager to provide the worker (and other parties in the supply chain), with the result of the IR35 review and, where requested, the reasons behind the decision. Alongside this, in an effort to reduce the potential disputes over IR35 decisions, there is also a proposal for the end client to be required to have a dispute process for workers to be able to raise any concerns over the IR35 decision and to have their comments taken into account.
It is worth noting that Public Bodies will also need to consider the new rules in the context of information sharing and introducing a dispute resolution process.
The consultation also addresses the matter of tax compliance behaviours of all the parties within a supply chain. It proposes creating a legal requirement for those parties in the chain to complete their respective obligations: if they don’t fulfil their obligations, they would become liable for the tax and NIC until the obligations are met.
In addition, and perhaps more importantly, there is a proposal that HMRC should be able to transfer the tax and NIC debts arising from non-compliance from any party in the chain back to the first agency and potentially to the end client. This is a significant part of the proposed new rules and the draft legislation will need to be carefully reviewed to understand fully how this could be applied in practice.
The consultation does also confirm that small businesses will be exempt from the new rules and draws on the Companies Act definition of a small company. For non-incorporated organisations, the Government is seeking input on how it can best define ‘small’ for the purposes of this legislation.
At first reading of the consultation document, the compliance burden would seem to sit primarily with the end client and the first intermediary, which seems reasonable given the end client wishes to utilise the worker and the first agency commits to supply the worker. The document clearly states that blanket decisions (ie for similar types of engagement) will not usually be appropriate, as all factors for each engagement should be considered. However, as the risk lies with the end client/first intermediary, we suspect that many organisations will seek to take a cautious approach – there will be a real danger that this could result in workers being incorrectly assessed as within IR35. Despite feedback on this point in earlier consultations, there is still no proposal for a statutory appeal process for a worker.
As we have more time to consider the consultation, further potential implications that may affect all parties who are part of the contingent labour supply chain are bound to emerge. Yet it is already clear that identifying off-payroll workers and complying with the new rules will place an additional administrative burden and is likely to increase costs for businesses in the private sector: we recommend businesses actively engage with the consultation process.
You can read the full consultation document at Off-payroll working rules from April 2020. BDO will be taking part in the consultation process so please feel free to send any comments to [email protected] or make a formal submission by the 28 May 2019 deadline.
Although we don’t have the final rules yet, April 2020 is not that far away and it is imperative organisations consider the potential impact to their business, to ensure there is sufficient time to identify and introduce any changes required to manage the compliance obligations of these new rules.
How can BDO help?
Our wide experience of both the public sector IR35 reform and the wider PAYE and NIC compliance obligations of engaging any type of non-payroll labour means we can help you manage this complex issue compliantly and efficiently.
We seek to work with you and the key stakeholders in the business to identify what contracts may be at risk, assess both the potential financial and operational impact on your business and implement changes that will minimise the impact of the new rules and build a robust compliance structure for the future.
If you have any questions on off-payroll workers, IR35 or any other non-payroll labour issues, please contact Jacqui Roberts or Nick Duffin.
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