See BDO's Off-payroll labour tools
The Government plans to introduce new legislation from April 2021 to help tackle the perceived abuse of tax and national insurance contributions (NIC) relating to off-payroll labour in the private sector (extending the rules in place for the public sector since April 2017).
Commonly referred to as the IR35 Reforms, the changes will affect medium and large private sector businesses that engage workers operating through an intermediary. An intermediary is usually a worker’s personal service company (PSC), but could also be a partnership, an LLP, a managed service company or even an individual. The rules are designed to ensure that where the individual works like an employee, but provides services through their PSC, they broadly pay the same tax and NIC as they would if they were a direct employee.
Currently, the responsibility lies wholly with the PSC to ensure the IR35 rules are considered and applied as necessary. From April 2021, it will be the responsibility of the organisation receiving the worker’s services (the client) to determine whether the IR35 rules apply.
Where the client determines the worker falls within the IR35 rules, the responsibility for then applying the correct tax treatment to payments made to the PSC will lie with the organisation paying the PSC, defined as the ‘fee payer’. The client and the fee payer may or may not be the same organisation.
There is an exemption for small clients and here the responsibility for applying the IR35 rules remains with the PSC.
Who is the ‘client’ and who is the ‘fee-payer’?
The client is the organisation in the supply chain that is ultimately receiving the individual’s services. The client is responsible for determining whether the individual would have been regarded as an employee if they were engaged directly.
If the client determines the IR35 rules apply, the fee-payer is treated as the employer for the purposes of income tax and NIC. The fee-payer is the organisation paying the PSC for the worker’s services.
For example, an individual supplies IT services to A Ltd through their PSC.
In this case A Ltd is the client as they are receiving the individual’s IT services. As the party responsible for paying the individual’s PSC, A Ltd is also the fee-payer.
As the client, A Ltd is responsible for reviewing the individual’s engagement status and determining whether the individual falls within the IR35 rules. If A Ltd decides that the IR35 rules apply, it will then be liable, as the fee-payer, for secondary Class 1 NIC and, where applicable, the Apprenticeship Levy. It will also be responsible for deducting tax and NIC from the payments made to the PSC. As the deemed employer, A Ltd must remit payments to HMRC and submit information about the payments using Real Time Information.
Labour supply chains
Where there are numerous parties involved, it is important to determine who the client and fee-payer are; they may not always be the same organisation.
Where the worker is engaged via an agency, the obligation to deduct income tax and NIC would fall on the agency or organisation in the labour supply chain making the payment to the PSC.
For example, an individual supplies IT services to A Ltd through their PSC and via an agency.
A Ltd is the client and makes payment to the agency. As the client, A Ltd is responsible for assessing if the IR35 rules apply and determining the IT worker’s employment status.
If A Ltd determines that the worker is a deemed employee, it will fall on the fee-payer to make the necessary tax and NIC deductions. It is the agency that pays PSC Ltd for the work undertaken by the individual and the agency is therefore the fee-payer in this arrangement.
Complex supply chains
It may not always be obvious who the client is for the purposes of the IR35 reform rules. If, in the above example, the agency is instead a consultancy company providing professional services rather than a temporary supplier of workers, you will need to consider whether the worker is supplying their services to the professional services firm or to the end user, A Ltd.
When deciding who has the PAYE and NIC obligations, you must identify the entity receiving the personal service of the worker and fully understand how the engagements work in practice. Use of tri-party contracts (where an agency takes a commission or a fee rather than the whole payment from the client) should also be considered very carefully to assess which payments fall within the new rules so that the correct PAYE and NIC deductions can be made.
Informing the parties
Where the new rules apply, the client must inform both the party they are engaging with and the worker of their decision whether or not the IR35 rules apply. The client must also provide reasons for its determination.
If there is a labour supply chain involved, the determination must be passed down each stage of the chain. It is wise to document this clearly as, if a party receives the status determination but does not communicate it down the labour supply chain, that party potentially becomes the fee payer. As the fee payer, they will then be responsible for deducting tax and NIC (and paying it to HMRC) until the determination is passed on to the ultimate fee payer.
It is important that any business that may be the ‘client’ fully understands who is who in every labour supply chain in which they are involved to ensure they can get their compliance processes right from April 2021. It is worth bearing in mind that understanding your supply chain will be part of any Corporate Criminal Offence (CCO) process. This requires companies to have reasonable procedures in place to demonstrate a defence against the CCO legislation. This means that if an associated person of a company facilitates tax evasion and the company is unable to demonstrate that it had reasonable procedures in place to prevent facilitation, the business is guilty of a criminal offence.
An associated person, for these purposes, is widely defined and could include clients, customers, employee’s agents and contractors. It is therefore essential for you to understand your chains of supply which involve entities such as PSCs, agency umbrellas and implement procedures to mitigate these risks.
For help and advice please get in touch with your usual BDO contact or Nick Duffin.
Employer Essentials index