Off payroll working
IMPORTANT NOTE: As a direct consequence of Covid-19, on 18 March 2020 the Government announced the proposed changes to the off-payroll working rules would be deferred by 12 months until 6 April 2021. We have left this Article as originally published for guidance purposes but references to “2020” should generally be read as “2021”. This page will be updated if HMRC issue any further interim updates, or once the actual legislation has been passed.
On 6 April 2020 further changes to UK tax legislation will come into force, directed at off-payroll working (or contractors) in the private sector. If caught, these changes are significant so we have compiled the below list of frequently asked questions to assist.
However, individual circumstances vary so please contact us if you would like to discuss these further. This information is provided as an indicative guide and is not a substitute for formal, professional, advice.
Who is affected?
The legislation is targeted at anyone providing personal services via an intermediary and who is not therefore taxed as an employee (actual or deemed).
“Intermediary” can include persons operating via the use of a personal service company, agency or partnership. Strictly a sole-trader (or traditional, one-man self-employed worker) is not caught by this legislation but long-standing employment income / PAYE rules would potentially apply in any event, so the same principles are relevant.
“Personal services” is further expanded upon below, but broadly means where the customer (or “employer”) is receiving the services of a specific individual and not, generally, that of another business.
Typically, this may include various workers in the construction industry, IT contractors, consultants and potentially other professional services, where the customer is procuring an “individual” rather than an “outcome”.
What has changed?
Previously a worker’s intermediary (their own personal service company) was responsible for determining whether they were providing personal services and operating tax deductions accordingly (usually known as IR35).
However, the changes enacted shift certain responsibilities onto the fee-payer (customer or “employer”). Particularly, the fee-payer has to determine the status of the worker and, if caught, make deductions of tax and national insurance from payments to the intermediary as though they were an employee.
Responsibility for this decision (and the associated tax deductions) will now rest with the fee-payer – which could make for a costly mistake if an incorrect conclusion is drawn.
Who does this apply to?
As of 6 April 2017, these changes have been enacted for the public sector – which would encompass fee-payers such as local authorities, schools / academies and NHS bodies.
As of 6 April 2020, these changes are being extended to encompass medium and large private sector fee-payers – which means any company exceeding at least two of the following:
- annual turnover of £10.2million;
- balance sheet total (gross assets) of £5.1million; and / or
- 50 employees.
This essentially follows small companies’ legislation although note a whole group is within scope if the ultimate parent fails the above. A simplified £10.2million annual turnover test applies for non-corporate fee-payers.
Whether an individual worker will be directly affected obviously therefore depends on the size of their fee-payer.
Is this just a one-off?
No – this applies to all work undertaken after 6 April 2020 (or 2017, as appropriate).
That means every contract operating on or after 6 April 2020 must be assessed for employment status. This would encompass: existing contracts which remain ongoing after the rules take effect; new contracts entered into after the legislation comes into force; and (material) changes to contracts which have already been tested under the new rules.
Can we just make a blanket decision for all contracts?
No – each individual contract must be assessed on its merits. However, a number of affected companies are making the company-wide decision to move away from contracting via intermediaries at all and instead will only engage workers under PAYE going forward.
Do we have to notify affected workers?
Yes. Once the rules are in place, and you have made your determinations, you must notify affected workers of the outcome of your decision (and your reasons for concluding so). Obviously, this isn’t strictly required until 6 April 2020 but it is advisable to start considering this now (see below).
Please beware workers have the right to appeal a determination if they disagree with it and you must have processes in place to deal with any disputes within 45 days.
How do we assess whether a worker is caught by the changes? How do we determine their employment status?
The employment status test is fundamentally unchanged from before – it is just the responsibility for conducting it that has altered.
“Employment status” has been a question for numerous tax (and indeed employment) cases and unfortunately there is no fixed definitive answer. HMRC provide their employment status test (“CEST” – which can be found at https://www.gov.uk/guidance/check-employment-status-for-tax) to help both fee-payers and workers make informed decisions. So long as the questions are answered truthfully, HMRC will accept a determination made by CEST on employment status however please be warned it has been widely criticised for a heavy “employee bias”.
Essentially the key question is whether the engagement is a “contract of service” or a “contract for services”. This is further explored below.
How can I make sure I am viewed as “self-employed”?
There is no one, single, defining factor which can categorically put a contract on one side of the divide or another. However, case law has long since established there are three core requirements for an engagement to be employment (a contract of service):
- personal service;
- control; and
- mutuality of obligations.
If any one of these three pillars is missing then a contract cannot be one of employment.
What does “personal service” mean?
That a service is performed by a specific individual personally (as per a traditional employment contract). This means the worker (or their intermediary) is not just being contract to provide something or to get something done but specifically for that worker to be providing a service.
This has often been used as a simple avoidance measure – many contracts include “the right to send a substitute” which would suggest there is no implicit personal service requirement. A useful tool, but remember the Courts will look through the paper contract and look to see evidence of how that actually operates in the real world…
What does “control” mean?
When engaging any supplier there is an element of control, but this test looks beyond this into the underlying relationship and practicalities.
Who determines when work is performed, or how it is performed, or by who? What is the management and supervision environment the worker operates under, i.e. do they have a fair degree of autonomy or are they routinely directed, managed or instructed by the fee-payer? Again, what actually happens may be more relevant than paperwork.
Essentially this is looking at whether there is a boss / subordinate type arrangement or a purchaser / supplier relationship.
What does “mutuality of obligations” mean?
This is the most difficult to define (or identify) but no less important. In an everyday (self-employment) contract there may be only a one-way obligation – do this thing and you will be paid and that’s it.
In an employment contract, there are mutual obligations on both sides. The employee gives their best efforts, full commitment and the results of the same to their employer. As well as payment for those services, the “employer” offers something else back – a mutual obligation exists on them to continue to provide work, to take the worker forward and from which both parties benefit (longer-term).
With an (“normal”) employee, you as the fee-payer cannot simply decide at 2.30 on Thursday afternoon that you don’t want them anymore – you have ongoing obligations to continue to furnish them with “services” to be completed. A self-employment arrangement can be very different.
This area is generally under-represented in HMRC’s CEST tool which is part of the reason for its heavy criticism.
So these are the only things that matter?
No, these are the essential building blocks. If any of these are clearly missing, then a contract for services it is (self-employment).
However, if it is difficult to determine on these alone (i.e. factors swing both ways) then other wider matters may need to be considered – e.g. who bears financial risk (if work isn’t completed on time, or to standard; who supplies tools and equipment etc) or whether the worker is operating as a genuine “business enterprise” (e.g. looking for other work; commercially viable; commercial interdependence etc).
My fee-payer has decided I am an employee, and will deduct tax accordingly – what can I do?
Firstly, all workers have a right to appeal a decision reached (and the engager has an obligation to address within 45 days). This would typically be a first port of call, but require an appropriate case to be set out accordingly.
Failing that, the overall “tax-loss” of the deemed payment calculations are very inefficient for the worker personally with the only practical option being to take an equivalent salary from the personal service company although you will also still be paying the costs of running a company.
It might be sensible, therefore, to approach your fee-payer as to revisiting your contract completely – if you are going to have employment taxes deducted anyway you might as well have the employment rights and benefits to go with it…?
I engage a number of contractors and am concerned about my business’ exposure to their taxes?
Again, contracts need to be reviewed on a case-by-case basis. Where there are engagements feeling uncomfortably close to employment in nature, it may be worth re-negotiating relevant terms with the workers just to put matters beyond doubt.
There are also contract review services available which should give some comfort if needed and, in some cases, potentially insurance against any subsequent losses arising.
So this is a problem for April? Nothing for me to do now?
The rules don’t take effect until April but the implications are far reaching. It would be eminently sensible to start opening conversations now, else there may be little time to act.
For fee-payers, the first step is scoping out potentially affected engagements (i.e. workers). It would be sensible to start reviewing their statuses now such that appropriate steps can be taken when necessary. Earlier conversations are likely to be more positively handled by workers than when under pressure – and there is plenty of time to resolve issues ahead of implementation.
Also, don’t forget payroll software may need updating or revisiting if intermediaries are to be subjected to employment taxes as of 6 April 2020.
For workers, it is difficult to be address any issues until you know your engager’s intentions. If you haven’t heard from them already, it would be sensible to open dialogue now so that you have some time available to address any concerns.