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New tax rules for off-payroll labour in the private sector are due to begin on 6 April 2021, extending the rules that have been in place for the public sector since April 2017.
From April 2021, medium and large businesses that engage workers operating through an intermediary are responsible for reviewing the status of each worker, determining whether or not they should be treated as a deemed employee. This responsibility currently lies wholly with the intermediary under the IR35 rules.
Businesses affected by the change should consider how they will manage their new responsibility and make sure systems are in place in advance of April 2021 to ensure they are compliant with the rules from the start. Failure to do so could not only lead to financial costs for the business, but also runs the risk of damaging important relationships with contractors and agencies as well as potentially leading to project delays.
Does your business have a timeline in place to manage the status determinations?
As well as carrying out detailed reviews of each worker’s employment status, businesses will be responsible for communicating that status determination both directly to the worker and down the worker supply chain. Where this is not done, the business could be unnecessarily liable for tax and NIC. Now is the time to discuss how your business can be prepared.
For existing contracts that will continue past April 2021, the status determinations should be made in advance so that the new rules can be applied from 6 April onwards. It may be useful to consider when your business will carry out the reviews so that the relevant parties can be made aware of your timeline. It may come as a surprise to some workers that they will be considered a deemed employee and may lead to some choosing to terminate the arrangement. Being made aware in advance will allow them to consider their options as well as giving your business time to plan.
What happens if a worker falls within the new rules?
Being considered an employee, rather than a worker, will mean an increased tax and NIC bill for the worker but they will not automatically be entitled to the benefits of being an employee, such as holiday pay or sick pay. Following the introduction of the off-payroll rules for the public sector in 2017 some workers made claims for these employment rights so it is worth being aware that this is a potential risk.
To attract new contract workers or retain existing ones the business may find an increase in the contractor rates, as the workers seek to counteract the increase in tax: clearly this could affect your business’ ability to keep to a project’s timeline or budget.
How will your business carry out the status reviews?
The status of a worker is not always straightforward and a number of factors will need to be considered. Having a transparent process within the business will reassure workers that their status has been fairly reviewed. It is important that businesses do not make any blanket determinations; the business has an obligation to review each worker’s position on a case-by-case basis.
Whilst businesses must review each worker individually, this has not stopped HMRC issuing blanket determinations itself. Recent press coverage has shown HMRC claiming that almost all the 1,500 contractors of a large multinational company should be treated as employees under the IR35 rules without reviewing that facts of each case. This shows how important it is that businesses are able to demonstrate how they reached their conclusion for every worker in the event of a HMRC enquiry. It is also a timely reminder that HMRC is actively targeting large contractor populations to challenge their employment status in advance of the new rules to ensure that the current IR35 rules are correctly enforced: could your business be in the firing line?
Have all factors been considered in the status review?
While HMRC has provided an online tool (CEST) to help determine whether a worker should be classed as employed or self-employed, this tool does not currently consider all of the factors relevant to a worker’s status and so it should not be solely relied upon to reach a conclusion. HMRC has promised that an improved version of the CEST tool will be published before April 2021. Businesses should consider all relevant factors and should record their findings so there is proof that reasonable care was taken.
It is important that businesses fully consider how the new rules will affect them and systems are put in place to manage their new responsibilities. Engaging with workers from an early stage and having a clear plan of how the business will implement the new tax rules will help to manage any expectations and avoid potentially expensive surprises.
For help and advice please get in touch with your usual BDO contact or one of our Employment Tax specialists.
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