Payroll spelling in wooden blocks on a table

Changes to the IR35 process or “off payroll workers” in the pipeline

The planned legislation

It is important to note that the consultation isn’t about whether this should be introduced, but how it will work when 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.

As now, it is the responsibility of an employer to assess a worker’s status to determine whether self-employed or an employee.  It is this assessment that will from April 2020, have another category “off payrolling” 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 and 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 tool is being worked on to make it more robust/enhanced and helpful to employers pre 2020.

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. 

Employers/agents etc. will need to undertake the CEST test and if it determines an off payrolling 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 determination has been made, the party, the client (client is if 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 falls 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 was seeking views as to whether this admin burden would be worthwhile in providing workers sufficient certainty on their tax position?  The consultation document was 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 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 proposed that a client-led status disagreement process should be conducted, which could be tailored to fit with the wider business; this might be because HMRC don’t want to deal with any initial disputes?  Questions were asked around the burden this might place on employers and required 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.  This concerned me a little, as it is most likely payroll will have the responsibility as it is in respect of payments rather than HR?

As you would expect the consultation document also examined the options for non-compliance and again provided a great illustration of what would happen in these circumstances.  There are a number of questions asked in this area such as; who would the liability of unpaid taxes fall to if the first agency couldn’t pay?

Small Businesses

The legislation will exclude “small” businesses which may cause confusion, especially when as a bureau, we would need to ascertain whether a client should be processing some of their service contractors through the payroll. The consultation document outlined their plans for what is a small business; a small business should be as defined by the Companies Act and it is acknowledged that accountancy professionals and tax advisors will likely know this; not sure at this point whether payroll professionals would as we tend not to need to know. 

Where the Companies Act definition doesn’t lend itself to is the non-corporate entities to ascertain whether “small”, HMRC was looking to include these, but with a simplified test. 

The options identified were:

  • Apply to those with 50 or more employees and to entities with a turnover exceeding £10.2million
  • Apply if they have both 50 employees and a turnover in excess of £10.2m

The test itself will be carried out in the same way as for those falling under the Companies Act i.e. the test will be met based on average number of employees over a year and again likewise with the turnover. There are some good examples of how this might work in the consultation document.

Processing the workers through the payroll

  • As now for the public sector, the fee payer (client) will act as an employer and deduct PAYE, National Insurance (employee and employer) and include 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, equates to the payment made to the worker
  • The real time information rules apply i.e. must be reported on or before payment is made
  • No student loan deductions can be taken (let us hope HMRC fixes their system so no student loan notice is sent!)
  • Employment Allowance – this will only apply on secondary contributions (employer) where there is a mix of employees and this type or 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
  • There is no entitlement to statutory payments as not deemed an employee
  • The worker’s PSC will not be permitted to deduct a 5% allowance in relation to engagements with medium and large size clients
  • Double taxation rules will continue to be applied as long as any corporation tax computations are adjusted

There are some other considerations for example, around agency workers,outsourcing (payroll bureau for example wouldn’t fall under this as a service provider) and pension arrangements.

From a practical point of view, the whole business will need to review any and all 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 do not believe we will not be able to carry out the checks for them, as we will not have all the required information. We will however, need to set up components to process these payments and 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. The legislation is due to be published in July and Armstrong Watson will be watching out for this. It is the plan of the payroll service line to communicate with clients in a number of ways, depending on what the legislation actually means.

Downloads

You can find the consultation document here >

For further advice on the upcoming changes to IR35 or help reviewing your business, please call Karen Thomson on 07825 561028 or email her at karen.thomson@armstrongwatson.co.uk.

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