Off-Payroll Working in The Private Sector – The Ticking Timebomb

While you might have been entertained over the last two years by the IR35-related tribunals involving celebrities such as Lorraine Kelly and Christa Ackroyd, a more significant issue closer to home has been looming large on the tax landscape. HMRC is planning to roll out their public sector version of ‘off-payroll’ working to the private sector.

Although this might risk being blown off course by the ongoing Brexit uncertainty, all medium and large private sector businesses employing off-payroll workers (contractors and freelancers) will feel the impact of the new off-payroll working rules when they become mandatory in April 2020.

As a signal-of-intent, HMRC published a consultation document on March 5th, 2019 aimed at seeking views on how the off-payroll working rules will work. This period of consultation concluded on May 28th, 2019.

Importantly, it proposed some changes to the existing public sector legislation and promised that any resulting amendments would be reverse-engineered into the 2017 public sector legislation.

Relief for Small Businesses

One piece of good news in response to feedback from AAT and other relevant parties is that HMRC has excepted operators of ‘small businesses’ from any requirement to implement the proposed rules.

HMRC has indicated that the definition of a small business will be in line with the Companies Act definition:

  • Annual turnover: less than £10.2m;
  • Balance sheet total: less than £5.1m;
  • Number of employees: less than 50.

While the definition may be apparent for companies, the definition of ‘small business’ for un-incorporated entities still needs to be adequately defined. Moreover, although the wording in the recent consultation document concerning the core deciding-components appears to be the same, what remains unclear is just how they are to be applied.

You Must Decide

According to the consultation document, it will be your responsibility (the ‘engaging party’) to determine whether or not a contractor is an IR35 deemed worker, based on the terms of the engagement.

You will also be expected to set out the reasons for reaching a particular decision, as well as working out the practicalities, how you will be required to share this information with other parties within the supply chain and even directly with the contractor.

A New Improved CEST

To help you determine a worker’s employment status, HMRC is to revamp its much-criticised Check Employment Status Tool (CEST) tool. As part of the revision exercise, it has promised to consult with interested parties to improve the way that CEST currently works.

It will be interesting to see how the department will rise to the challenge of addressing the full range of different concerns about the existing operational shortfalls levelled at CEST. One key area of interest is the Mutuality of Obligation (MOO), and the department’s ability to improve this will be seen by many as a critical test.

Who Is Responsible?

As can be expected, any party in a lengthy supply chain that fails to meet its obligations under the proposed legislation will, at least in the first instance, be held liable by HMRC for any monies due.

However, in a move intended to protect the public purpose, HMRC proposes that any liability will transfer back up the supply chain where HMRC finds itself unable to recover the monies due. This may ultimately fall back on you in some instances. In HMRC’s view, this, therefore, requires that the right incentives are in place so that all parties in the supply chain not only comply but are also ensuring the compliance of others further down the line.

Right of Appeal

HMRC is also promising to introduce a statutory appeal process. The absence of any such process in the 2017 public sector legislation left many workers exposed to inappropriate decisions and even the subject of a blanket employment status decision without a right of appeal. This was seen as a severe oversight in AAT’s opinion.

What Action to Take

You should take steps to ensure that you’re aware of this new change and ask yourself how you might be affected.

As HMRC has only recently closed its consultation response window, the department will still be sifting through a deluge of response, and the final legislation still resembles shifting sands. Consequently, we are issuing a health warning to the effect that nothing is certain until the underpinning legislation has been passed.

Having acknowledged that our advice is built on nothing more robust than the legislative equivalent of these shifting sands, we are outlining the fundaments of what is currently proposed:

  • From April 6th, 2020, medium and large businesses will need to decide whether the rules apply to an engagement with individuals who work through their own company.
  • Where it is determined that the rules do apply, the business, agency, or third party paying the worker’s company will need to deduct income tax and employee NICs and pay employer NICs.
  • HMRC has promised to revamp its CEST tool to help businesses determine whether the off-payroll working rules apply.

Finally

We’ll be keeping a close eye on this challenging IR35 issue and closely monitoring future developments, and if there are any updates, we’ll let you know.