Changes to the Off-Payroll Working Rules
If your business uses contractors or you supply contractors to businesses you need to be ready for the new off-payroll working rules which will come in to effect on 6th April 2021. The changes were originally due to come in to force in April 2020 but in light of the Covid-19 pandemic the Government pushed the implementation date back to April 2021 to give businesses and individuals more time to prepare.
What is Going to Change?
At the moment individuals who provide their services through an intermediary (commonly a personal service company) are responsible for determining their employment status and accounting to HMRC accordingly. If they determine that the arrangements between the contractor and client constitute a deemed employment they have to account for income tax and NICs.
From 6th April 2021 however the responsibility for assessing employment status will transfer from the intermediary to end user clients. This means that clients will be required to undertake an assessment of the status of each and every contractor they use. The client will need to confirm their decision in writing by way of a status determination statement. This statement will need to be provided to the individual worker and any other party in the contracting chain (e.g. an agency that supplies those individuals to the client).
Clients are required to take “reasonable care” when producing these statements. This means it will not be acceptable to simply determine that all workers are caught by the rules without assessing each case. It would also be advisable to keep a record of the decision making process.
If a client determines that an individual is in fact an employee and not a self-employed contractor then whichever party is responsible for paying that contractor (i.e. the client or the agency supplying the contractor in a four party chain) will need to deduct and pay tax and NICs contributions to HMRC.
Contractors and if applicable agencies will have the right to challenge any status determination statement and if they do the client will then have 45 days within which to respond.
Do These New Rules Apply to Everyone?
The off-payroll working rules will only apply to medium and large sized organisations. This is defined as an organisation with meets at least 2 of the following criteria:
- Annual turnover of more than £10.2 million
- Balance sheet total of more than £5.1 million
- More than 50 employees.
For companies that do not meet the above definition, the current IR35 rules will apply which means the intermediary will retain responsibility for determining the status of the contractor.
How to Prepare
Clients will be required to provide status determination statements to all their contracting workforce on 6th April 2021 (if not earlier) so they need to start taking action now. Our advice is for clients to assess their contracting workforce now so they will be ready to issue the statements on or before 6th April 2020.
When assessing an individual’s status for the purposes of producing a status determination statement, the following factors should be taken into account:
- Personal service – does the individual have to provide their services personally?
- Mutuality of obligations – is the end user client obliged to provide work and is the worker obliged to accept work?
- Right of substitution – can the individual send someone else in their place? Is that an unfettered right? Have they ever sent anyone else?
- Control – how much supervision, direction and control does the end user client exercise over the individual in terms of what they do, when they do it, where they do it and how they do it?
- Financial risk – does the individual risk their own money? For example if they make a mistake do they have to rectify this at their own cost.
HMRC has an online tool, CEST, which businesses and individuals can use to find out if someone should be classed as self-employed or employed for tax purposes. HMRC agree to stand by any CEST decision provided the information that has been supplied is accurate and the tool has been used in accordance with their guidance.
Depending on the results of the status determinations, clients may want to make changes to the way in which they engage contractors. For example they may want to amend the terms of any consultancy agreements to minimise the risk of the consultants being deemed employees. Alongside this they may also want to make practical changes to the way contractors work within their organisations.
Some clients may even want to bring any consultancy agreements to an end and either directly employ those individuals or engage them through umbrella companies to avoid any of the issues outlined above. This may or may not be attractive to clients or contractors but certainly in the financial services sector lots of large organisations have been doing this.
In addition to the above, individual contractors may also want to seek advice on their likely status so they know where they stand in advance of the changes and can start to engage with their clients and/or agencies. It may be they want to propose some changes of their own to tip the balance in favour of them being self-employed.
What Happens if I Don’t Do Anything?
If a client fails to provide a compliant status determination statement to an individual contractor and/or contracting party it will become liable for deducting and paying the relevant employment taxes. Likewise, if anyone in the supply chain fails to pass on a status determination status that party will become responsible for deducting and paying tax and NICs.
In addition to recovering the tax that is due, HRMC can also impose fines and penalties on any defaulting party which could be up to 100% of the tax due.
We Can Help
If you run a business that has a large contracting workforce or you provide contractors to businesses, we can help.
We can sit down and assess your current contracts and working arrangements with contractors to advise on their likely status. We can then work with you to agree a strategy to deal with any high risk individuals which may involve changing their contractual terms or even bringing the consultancy arrangement to an end. We can also offer advice on potential changes to working arrangements to try and minimise the likelihood of an individual being classed as an employee.