Off-payroll working in the private sector: further policy paper and consultation

HMRC is consulting on the implementation of the rules which will make large and medium businesses responsible for operating the IR35 rules in cases of “disguised employment” with effect from April 2020.

HMRC has published a further policy paper and consultation document on extending the off-payroll working rules to the private sector from 06 April 2020. The document, “Off-payroll working rules from April 2020”, provides further details of the proposed reform as well as consulting on some of the detailed provisions. The closing date for responding is 28 May 2019.

Background

The IR35 legislation was introduced in 2000 to address the growing use of personal service companies (PSCs) to prevent an employment relationship arising. By doing so, both worker and engagers gain potential tax advantages, including lower amounts of both NICs (for engagers and workers) and income tax. Under the IR35 rules, where the relationship between the worker and engager would have been one of employment in the absence of the PSC, IR35 ensures that the worker's income tax and NICs liability is broadly equivalent to that of an employee and imposes a PAYE and NICs obligation on the PSC.

However, the Government became increasingly concerned that these rules were not working effectively and, as a result, in April 2017 introduced significant changes to make engagers in the public sector responsible for ensuring the correct operation of the IR35 rules.

Following the perceived success of the public sector reform, the Government published in May 2018 a consultation document, “Off-payroll working in the private sector”, which suggested extending the public sector approach to the private sector and this decision was confirmed in the October 2018 Budget, albeit restricting the reforms to large and medium businesses and delaying implementation until April 2020. The reform will mean that affected businesses in the private sector will need to determine whether a worker is a deemed employee and, if so, account for tax and NICs on their payments. For further details, see “Off-payroll working in the private sector”.

Policy paper and consultation

The paper confirms that small companies (as defined in section 382 of the Companies Act 2006) will not be caught by the new rules and that the existing test in the Companies Act 2006 will be used for this purpose. As such, a company will be “small” if it meets two of the following three requirements: an annual turnover of not more than £10.2m; a balance sheet total of not more than £5.1m; and not more than 50 employees. A similar test, based either on employee numbers or turnover (or possibly and subject to the consultation responses, both), will apply to exclude small non-corporate entities, such as partnerships. Anti-avoidance provisions will be considered to ensure that the small entity exclusion cannot be abused.

The Government is keen to ensure that the extension of the public sector rules to the private sector operates with the minimum administrative burdens whilst taking into account the different considerations involved in the private sector (including longer labour supply chains). As such, the paper suggests a number of reforms, which if implemented, would also be applied to the public sector rules from April 2020.

The proposed changes include:

  • Requiring engagers additionally to provide the status determination that they are currently required to provide to the contracting party directly to the worker, and, if the worker requests, reasons for its determination.
  • Requiring each entity in the labour supply chain to pass the status determination and reasons down the supply chain to the fee payer with consideration being given to simplified information flow chains in complex cases.
  • Extending the provisions for transferring tax and NICs in the event of non-compliance to the first party or agency in the supply chain if HMRC is unable to collect outstanding tax and NICs from an entity because, for example, it has ceased to exist.
  • Requiring clients to implement a process for resolving status disputes.

In addition, the Government is considering allowing fee-payers to make contributions to a worker's personal pension, which would effectively be tax and NICs free.

Finally, the paper confirms that HMRC will to continue to work with stakeholders to deal with concerns in relation to the Check Employment Status for Tax (CEST) service. These include working to enhance the service, improving the guidance and developing an education and support package for affected businesses.

Comment

The paper is open for comments until 28 May 2019, which should be sent to offpayrollworking.intheprivatesectorconsultation@hmrc.gsi.gov.uk

Draft legislation for the implementation of the reform will be published in the draft Finance Bill in summer 2019.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.