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Get to grips with IR35

Part of my role heading up the payroll service, is to ensure the team keep up-to-date with legislation. With the best will in the world, whilst they are all members of the CIPP and regularly read magazines such as Reward Strategy, their priority is to set up and process client payrolls. Therefore, I take the responsibility of monitoring new legislation on a daily basis. As part of this work, when a consultation is published, I review it and not only need to see how it will impact the payroll team, and our processes and procedures, but how it will impact clients and the wider business. Lately I have been concentrating on the Off-payroll working rules from April 2020 consultation, on off-payroll working in the private sector, or as we know it: IR35.

Planned legislation

It is important to note that the latest consultation isn’t about whether this should be introduced, but how it will work when it is introduced from April 2020. It is vital that those people who work through an intermediary, such as their own personal service company (PSC), agencies, accountants and agents who engage the services of a worker, HR managers and of course anyone involved in payroll, are aware of these changes. It is currently the responsibility of an employer to assess a worker’s status to determine whether self-employed or an employee. It is this assessment that, from April 2020, will have another category: off-payroll working for the private sector. One could argue that it does exist now, but as many will know - determining and wading through the IR35 mud can be difficult. We currently use what was called the Employment Status Tool to help us determine employment status. When this legislation was introduced to the public sector, the tool was revised to encompass this legislation and became the Check Employment Status for Tax (CEST) tool.

I understand this is being worked on to make it more robust/enhanced and helpful to employers pre-2020.

Determining status

The aim of this legislation is to ensure those individuals who work like employees, pay broadly the same amount of employment taxes and National Insurance contributions (NICs). In a nutshell, employers/agents and so on will need to undertake the CEST test and if it determines an off-payroll worker, then the tax and NICs will need to be deducted from the service amount charged. This is required by the time the contract starts or before the worker provides their services. It should be noted that once a 

It should be noted that once the client (client is if it is through another person or entity) contracts with has a legal right to ask for reasons, so perhaps it would be wise to keep a copy of the information input into the CEST tool and its outcome. If the client doesn’t provide the determination or delays providing it (within 31 days), the liability of tax and NICs fall on the client - albeit they can later rectify it. The consultation looks at this area in more detail and proposes that legislation be introduced whereby

all parties are aware of the determination. The document provides an illustration as to how this might work, which would mean all parties involved would be notified. The consultation document is seeking views as to whether

this admin burden would be worthwhile in providing workers sufficient certainty on their tax position.

The consultation document is also seeking views on whether there are circumstances in a breakdown of the determination not reaching all those involved in the chain. One example where this might happen is with offshore PSCs: Will it always be possible for the client to identify the fee-payer?

The document goes into some detail  around where disagreement about the determination is reached. I recall many years ago, if payroll were unsure as to whether someone was self-employed or not they would be deemed an employee and leave the individual to sort it out with HMRC. This, I might add, wasn’t done out of laziness, it was due to ambiguity and employers didn’t want to risk getting it wrong. The legislation is intended to make it very clear when the rules apply, presumably to prevent employers adopting a “one size fits all” approach and instead assess each worker. It does state there may be circumstances when batching workers doing the same role, may be appropriate.

Interestingly, the consultation proposes that a client-led status disagreement process should be conducted - might this be because HMRC don’t want to deal with any initial disputes? Questions are asked around the burden this might place on employers and it requires detailed answers. The government doesn’t believe it will cause a burden, as it has assumed larger organisations will have sophisticated HR processes in place, but my concerns are that payroll is likely to have the responsibility, not HR, because it’s about payments.

As you would expect, the consultation document also examines the options for non-compliance and again provides a great illustration of what would happen in these circumstances. There are a number of questions being asked in this area, such as: who would the liability of unpaid taxes fall to if the first agency couldn’t pay? After digesting the previous consultation responses, I find a fly in the ointment that the legislation will exclude “small” businesses, as defined by the Companies Act. Whilst I am pleased this burden won’t be passed to these employers, I am concerned it might cause confusion, especially when as a bureau we need to ascertain whether a client should be processing some of their service contractors through the payroll.

Yet, the government is also consulting on how these rules will be applied to non-corporate entities, such as the public sector and charities. It is proposing the following options:

  • Entities with 50 or more employees;
  • Entities with turnover exceeding £10.2m;
  • Entities that have both 50 or more employees and turnover in excess of £10.2m.
How to process

For the public sector, the fee payer (client) will act as an employer and deduct PAYE, NICs (employee and employer) and the total pay bill for the calculation of the apprenticeship levy. This means you take the service cost, exclusive of VAT, and calculate monies due, add any allowable non-taxable expenses to it, plus the VAT, which equates to the payment made to the worker.

Other things to consider here:

  • Real time information rules apply;
  • No student loan deductions can be taken (let us hope HMRC fixes their system, so no student loan notice is sent);
  • There is no entitlement to statutory payments, as not deemed an employee;
  • The worker’s PSC will not be permitted to deduct a five percent allowance in relation to engagements with medium and large clients;
  • Double taxation rules will continue to be applied as long as any corporation tax computations are adjusted.

As well as the above, employment allowance: this will only apply on secondary contributions (employer) where there is a mix of employees and this type of worker. Where a payroll is run purely for this category, the allowance will not apply. I am also assuming the change in legislation from 2020, whereby if an employer has £100k secondary NICs or more in the previous tax year, then the allowance will not be applied. And still there are more things to think about, from agency workers to outsourcing and pension arrangements.

From a practical point of view, the whole business will need to review any and all of their service contracts to ascertain whether this will apply. Payroll will need to help educate the business and, in our case, clients to ensure they are aware of this legislation. We will not be able to carry out the checks for them, as we will not have all the required information, but we will set up components to process the payments.

I hope our payroll software will endeavour to help us make it as simple as possible to process. I suspect we will need to potentially create additional nominal reports for clients too. More on this to follow, as it evolves.

You can read the consultation Off-payroll working rules from April 2020 here.

If you have any questions about the Off-payroll working rules from April 2020 (IR35), please get in touch with Karen Thomson on 07825 561028 or email her at karen.thomson@armstrongwatson.co.uk

Contact Karen

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