IR35 Off Payroll in the Private Sector Rules Published

on Thursday, 06 February 2020.

IR35 Off Payroll in the Private Sector Rules Published

The draft reforms for the off-payroll legislation, commonly known as IR35 have now been published by the Government and are contained in the Finance Bill 2019-20.
These provide that private sector firms who enter into contracts or make payments to workers engaged through a Personal Service Company (PSC) on or after 6 April 2020 will need to check the individual’s “deemed” employment tax status.

Reforms in the public sector were introduced in April 2017 with the prospect of this extension into the private sector introduced in the 2018 Budget. The legislation will come into force from 6 April 2020. Where the individual’s role does look akin to an employment type one the engager, agency or third party paying the worker’s company will need to deduct income tax and national insurance contributions (NICs) and pay Employer NICs. The responsibility for determining whether the offpayrolling rules apply will move to the organisation receiving the individual’s services.

The proposed reforms

A company that qualifies as a “small” business will not be required to apply the new rules. In these circumstances there is no change and the PSC will assess their own IR35 position, as they are required to currently, and be liable for income tax and NIC deductions, as appropriate. A company will be regarded as small for this purpose if it has two (or more) of the following:

  • Turnover – not exceeding £10.2 million.
  • £5.1 million or less on the Balance Sheet.
  • Number of employees not exceeding 50.

Any business so identified as small using the above guidance will still be required to apply the new rules if it is a subsidiary of a large or medium sized parent. Further, anti-avoidance provisions are intended to ensure a business will not be able to contrive a situation which artificially creates a small business exemption.

The impact Where an individual works for a medium or large sized engager outside of the public sector, through their own PSC and falls within these rules:

  • The party paying the worker’s PSC (the fee-payer) will be treated as an employer for the purposes of income tax and Class 1 NICs.
  • The amount paid to the worker’s intermediary for the worker’s services is deemed to be a payment of employment income.
  • The party paying the worker’s intermediary (the feepayer) will be liable for secondary Class 1 NICs and must deduct tax and NICs from the payments they make to the worker’s intermediary in respect of the services of the worker.
  • The person deemed to be the employer for tax purposes must remit payments to HMRC and to send HMRC information about the payments using real time information (RTI).

Client-led disagreement process

A status determination statement outlining the endclient’s IR35 status decision must be provided to both the contractor and any party directly engaging the contractor (typically an agent). Until this is provided the end user will remain responsible for collecting income tax and national insurance. If the contractor does not agree with the IR35 status decision there is a new client-led disagreement process. This requires the end-client to review a decision and provide a reasoned response within 45 days. If this deadline is not met the end-client will assume the IR35 liability.

CEST tool – New and Improved?

In light of the impending changes to IR35 in the private sector regulations, HMRC have been promising improvements to their existing online Check Employment Status for Tax (CEST) tool to help engagers more accurately determine employment status and establish if the engagement falls within the scope of the IR35 regulations. On Monday HMRC released the, much anticipated, new version of the CEST tool.

Historically there has been widespread criticism of CEST with the results often being overridden by the courts. So, does the new version offer the improvements promised?

Encouragingly there is certainly more depth to the questions now being asked. The tool now probes into areas such as mutuality of obligation and delves deeper into matters of control and financial risk – all key factors in determining status.

As before, the question of substitution remains an early question. Historically when it was confirmed that a substitute has been provided and that substitute was paid by the contractor, CEST would return an immediate verdict of self-employed with no additional questioning. Reassuringly the new version continues to probe into the other factors such as control and supervision, financial risk and mutuality of obligation. However, despite these additional questions being asked, clearly the issue of substitution is still somewhat of a “slam dunk” for being self-employed.

We have road-tested the new model. When responses are flexed suggesting the contractor was under complete control of the engager (with how, when, where and what being dictated by the end user and the worker bearing no financial risk), a verdict of self-employed was still returned. Only when the response to who pays the substitute was altered to confirm this as being the engager, did the outcome change to employed. This seems inconsistent with the approach we have seen taken by HMRC when conducting status reviews.

When a negative response is entered to the right to provide a substitute, the verdicts do become more varied, seemingly taking into account the level of control, financial risk and mutuality of obligation in place. As with its predecessor, CEST can still return a result of “unable to determine status” which is clearly not helpful. HMRC vow to stand by the results of CEST but, and this is crucial, only when they agree with the answers given. As the questions are clearly subjective and based on individual interpretation of the engagement, it’s easy to see how HMRC could disregard the verdict of CEST

The question remains – does CEST provide the solution to businesses looking to assess their contractor population ahead of the changes next April?

In short, not entirely.

Any tool asking a series of black and white questions, to what is a very grey area, is somewhat flawed by its very nature. CEST fails to consider the context of the engagement. he weighting that should be applied to the various aspects differs hugely between sectors and the specific role being considered.

CEST fails to consider the context, thus does not have the ability to discount areas that would otherwise be considered neutral. HMRC themselves confirm the need to stand back and paint a picture in order to establish the status. CEST is rather like the numbers on a dot to dot - a starting point but not a whole picture.

The limitations within the CEST tool are likely to be mirrored in other applications designed for the same purpose. As with CEST, any tool is only as good as the information entered into it. This information is open to interpretation and as such should only be a part of the process and not solely relied upon to make the determination.

It remains the case that employment status needs a human touch. CEST can be a useful addition to the process in determining status but should not be the only tool in the box. Seeking the advice of human experts remains the most effective way of reaching a reliable conclusion.