HMRC has published its latest consultation on off payroll working rules. As we have previously discussed (Global Workplace insider post – June 2018), the reformed off payroll rules which have applied in the public sector since April 2017 will be extended to the private sector from 6 April 2020. The consultation has raised significant issues for private sector employers who employ contractors.
The off payroll working rules, known as IR35, are intended to ensure that individuals who personally provide their work to a client via their own personal service company or other intermediary, pay broadly the same employment taxes as employees, if they would be considered to be an employee or office holder of the client except for the existence of the intermediary. The broad proposal is that, with effect from April 2020, the client, rather than the intermediary will be responsible for determining whether the IR35 rules apply. The fee-payer (usually the organisation paying the worker’s personal service company) would then need to make deductions for income tax and NICs and pay any employer NICs if the client has determined that IR35 does apply.
Clients will therefore have much more responsibility for gathering information. Under the current position, which applies in the public sector, clients have to provide a determination to the party with which they contract at the start of the contract. The new proposals go beyond this and require clients to inform both the entity with which they contract and the individual contractor of their determination and if requested, provide them with the reasons for it. The status determination and reasons would also need to be passed on down the contractual chain so that all parties in that chain have sufficient information to allow them to comply with their obligations under the rules.
In situations where HMRC does not receive the tax due, liability would then rest with the party that has failed to fulfil its obligations: liability would move down the labour supply chain as each party fulfils its obligation to pass on the status determination made by the client. This means that the client organisation may be liable for any unpaid income tax and class 1 employee national insurance contributions due on deemed payments of employment income until it has managed to fulfil its obligations under the new rules. In addition, if HMRC were unable to collect the outstanding liability from a party further down the chain, for example because it ceased to exist, the government proposes that liability will transfer back up to the first party or agency in the chain and if HMRC could not recover from them, ultimately to the client. This means that the due diligence being performed by the client on the whole of the supply chain will be much more significant in order to ensure that they will not be left with liability.
It is also proposed that a procedure must be established to allow for the parties to challenge the determination. This could be similar to a grievance procedure.
Although the consultation has amended the provisions to ensure that small employers will not be required to comply with the new changes, there will still be a large number of employers who are affected.
So what should businesses be doing to prepare for the changes?
It is important that clients who contract with suppliers begin taking steps to ensure that they will be in a position to comply with the new rules. These should include:
- Identifying contractors supplying their labour through an intermediary
- Completing due diligence on the supply chain (including financial liability of the entities in the chain)
- Considering changes to any protocols for engaging future contractors
- Ensuring that there is a system to assess contractors employment status regularly and a process for documenting the determination
- Identifying any adjustments to working practices
- Ensuring there is a contract in place for working arrangements for each contractor and considering changes to any standard form consultancy arrangements.