Following a consultation in the spring, legislation will be introduced effective from 6 April 2020 requiring businesses to operate PAYE and NIC where they engage with workers through limited companies and that worker would otherwise be considered an employee. Where the worker is engaged via an agency, the obligation to operate PAYE and NIC would fall on the agency or organisation in the labour supply chain making the payment to the worker’s company.
These rules replicate the existing legislation, in force since April 2017, for workers providing services to the public sector. While the public sector legislation has largely been mapped across to the private sector, there have been some general changes to the legislation affecting both the public and private sector and there is an exemption where the engaging business is ‘small’.
IR35: Small business exemption
This exemption uses the existing tests for incorporated businesses which uses a combination of annual turnover, balance sheet and number of employees. For unincorporated businesses only the annual turnover test will apply but it will be by reference to a single accounting year rather than the two year test for incorporated businesses.
For businesses that cease to be small, the date from which the off-payroll legislation will apply is dependent on whether the business is incorporated or unincorporated. More details on how the small business exemption applies can be found, here.
Where the legislation applies, the end business must inform both the party they are engaging with and the worker of their decision whether or not an employment would be deemed. If there is a labour supply chain involved, the determination must be passed down each stage of the chain.
IR35: Decision making support
To help businesses in determining whether employment would be deemed, HMRC has promised to publish updated guidance and ‘targeted communications’ to provide industry specific support. An improved Check Employment Status for Tax (CEST) tool has also been promised following negative feedback on the current tool from taxpayers and advisers as well as tax tribunal rulings that have upheld decisions contrary to status outcomes given by CEST.
IR35: Right of appeal
One area that was not covered by the public sector reforms but the private sector legislation does include is a right of appeal where the worker does not agree with a determination that employment would apply. Where a worker contests the determination, the engager must respond within 45 days stating the reason why or that they have changed the determination.
Although mooted in the consultation, there is no formal appeal mechanism although there is a right of appeal. How the dispute will be resolved will be a matter for guidance to be published by HMRC (although it will not get involved in such disputes) but 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.
IR35: Transfer of debt
Where a worker is provided through a labour supply chain and obligation to operate PAYE and NIC arises but an intermediary fails to operate them, the first intermediary who engages with the end client will be liable for the debt. The Government has stated that HMRC will only use those powers in the cases of deliberate default or structured tax avoidance and guidance will be published to provide more clarity on where HMRC will use these powers.
This represents a significant change in how businesses will engage with off-payroll labour and it is important to start reviewing how your business engage with off-payroll labour immediately.
For labour supply agencies this also represents a major shift in how they engage with both clients, workers and their wider supply chain and therefore will need to undertake due diligence on their processes and procedures.
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 businesses manage this complex issue compliantly and efficiently.
We seek to work with key business stakeholders 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.
How will your business cope with these new rules? Take our survey.
Read more on Managing the risks of non-payroll labour.
Back to Draft Finance Bill 2019/20