Off-payroll working new rules and how they affect you

Promotional Business Feature. Pictured: Sue Daye
Sue Daye Crowe

By Sue Daye, Private Client and Professional Services Tax Partner, and Caroline Harwood, Partner, Head of Share Schemes and Employment Tax at Crowe

It’s not just high-profile BBC presenters that have been caught by HMRC’s crackdown on the use of the Personal Service Company (PSC). The issue applies to all workers who provide their services through a PSC or other intermediary to large and medium-sized businesses.

In July 2019, new draft off-payroll working rules were published, introducing changes to the current regime which is known as IR35.

The new rules take effect from April 2020. They require organisations engaging workers via an intermediary to check whether the individual providing the services should be treated as an employee or self-employed for tax purposes.

If these checks show that the relationship is effectively one of employment, and therefore IR35 will apply, the business will have to deduct PAYE and NIC from payments made for the worker’s services.

Previously it was the responsibility of the PSC to make these deductions, but HMRC’s view was that fewer than 10 per cent of these organisations actually complied.

It is estimated that this measure could raise as much as £1.3 billion in tax by 2023-24. This is something that businesses must be aware of and account for in their budgeting.

The rules already apply to public sector employers, but the new rules will apply to all medium and large businesses in the UK from next April.

Small businesses will initially be exempt.

A small business is defined as an incorporated body that meets two of the following three criteria:

  • A turnover of less than £10.2 million
  • A balance sheet of less than £5.1 million
  • Fewer than 50 employees.

However, an incorporated business need only exceed the £10.2 million turnover figure to be considered “not small”. The new rules apply from 6 April 2020.

It is essential that affected businesses take action now to ensure that they are ready to comply with the new regime from next April by identifying all off-payroll workers and reviewing the terms of engagement and the necessary policies and procedures put in place.

This will including documenting the engagers’ conclusions regarding the employment status of the worker and issuing a “Status Determination Statement” to the worker, the PSC and any other intermediary (such as an agency) in the chain of engagement.

This is a good time to evaluate business strategies and consider whether current methods of engaging workers are compatible with the new legislation and whether the current practices still fit the business’s requirements.

If a business establishes that the new rules will apply and it should be deducting PAYE and NIC from payments made to a worker, it will need to evaluate the cost of the employer’s NIC which will also apply, as well as any Apprenticeship Levy payments.

This will need to be built into budgets and many engagers may re-evaluate the rates they are prepared to pay freelance workers as a result.

If the business continues to engage with PSCs, it is the engager’s responsibility to perform and evidence an employment status check on the individual.

Employment status is subjective, based on case law rather than legislative tests.

The risk of getting the status wrong is expensive. Not only would the engager be subject to interest costs and potentially penalties for failure to operate PAYE correctly, but it opens up the possibility of back taxes on the individual for four or six years, depending on the specific rules applied. NIC can be charged going back six years.

Take time now to assess the implications of the changes to the IR35 rules as they affect PCS engagement. This should be done well ahead of the 6 April 2020 deadline.