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New tax rules for off-payroll labour in the private sector are due to begin on 6 April 2021, as detailed here.
The new rules (commonly referred to as the IR35 rules) mean that medium and large businesses engaging workers operating through an intermediary are responsible for reviewing the employment status of each worker to determine whether or not they should be treated as a deemed employee. This responsibility currently lies wholly with the intermediary under the IR35 rules. An intermediary can be a partnership, LLP or single person limited company, but the most common example is a personal service company or ‘PSC’.
As well as carrying out detailed reviews of each worker’s employment status, businesses will be responsible for communicating that status determination to both the worker and the party they contract with for the supply of the worker. Where this is not done, the business could become unnecessarily liable for tax and NIC.
Responsibility for communicating the status determination
When a business has reviewed a worker’s status, regardless of whether the business concludes that a deemed employment exists, it must give both the party they are engaging with and the worker a Status Determination Statement (SDS) confirming its conclusion and the reasons behind that conclusion.
If there is a labour supply chain involved, the determination must be passed down each stage of the chain by each party until it reaches the fee-payer. The fee-payer is the entity which pays the intermediary through which the worker supplies their services. It is wise to document this clearly as, if a party receives the SDS but does not communicate it down the labour supply chain, that party 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.
In the below diagram, the black arrows mark who is responsible for passing the SDS to which party.
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 and must be able to demonstrate that reasonable care has been taken in making a determination.
There will be a right of appeal, and although there is no formal appeal mechanism, the client will be required to introduce a process to consider any appeals. Where the worker contests the determination, the client must respond to the worker within 45 days. If the client concludes that the original determination is correct it must provide reasons for its conclusion, whilst if the client concludes that its initial determination was incorrect, it must issue a new SDS.
Failure to respond to the worker with the 45 days may result in the client being treated as the fee-payer and becoming liable for tax and NIC.
The precise format of how any dispute will be resolved with be a matter for guidance to be published by HMRC (which will not get involved in such disputes). It should be noted that this right of appeal will apply to individuals working for public sector engagers as well as private sector businesses from April 2020.
It is important for any business that may be the end client to fully understand 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.
Businesses affected by the IR35 changes should consider how they will manage their new responsibilities and make sure robust 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. Although the introduction of the rules was postponed due to COVID-19, it is important to use the extension of time wisely.
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