What are the off pay-roll working rules?
The off pay-roll working rules are designed to help the Exchequer collect tax and NICs more effectively when contractors supply their services to a client through an intermediary such as a personal service company (PSC). For large and medium sized clients, the rules will replace IR35 which was introduced for the same reasons but has not been particularly successful. Under IR35, the PSC has to account to HMRC for income tax and NICs if the contractor has “deemed employment status”. A contractor is considered in “deemed employment” where, but for the PSC, they would have been regarded as an employee of the client engaging them. This involves a consideration of the nature of the work performed and the terms under which it’s performed.
Under the off pay-roll working rules, the entity which pays the PSC (the fee payer) will take over the role of paying HMRC the tax and NICs. The client has new responsibilities to determine the employment status of the contractor and therefore to determine whether the off payroll working rules apply.
The rules were introduced in the public sector in April 2017 and it is now proposed that they will be introduced in the private sector in April 2020.
What does this note cover?
This note outlines the key proposals contained in HMRC’s consultation which seeks views on how the off payroll working rules should be amended so that they apply to the private sector. For more detail on the background to these rules and how they currently apply in the public sector, see our summary.
What are the key changes proposed in the consultation?
Although the private sector rules will be based on the public sector rules (which came into force in April 2017), this new consultation is proposing some changes in line with feedback received on certain practical aspects of the rules. The key proposed changes, which if implemented will also be made to the public sector rules, are as follows:
Determining status and giving reasons: it is proposed that the employer (otherwise described as “the client” in the consultation), who is required under the current public sector rules to determine the status of the worker, should provide the status determination to both the contracting party and directly to the worker, and give reasons for its determination if requested by the contracting party, the fee payer (ie the entity which pays the worker or the worker’s personal service company – PSC) or the worker. Also, each entity will be required to pass the status determination and reasons down the supply chain.
Enforcement and consequences of non-compliance: currently non-compliance by the client (such as failing to provide a determination) can result in the client being liable for tax and NICs. It is proposed that these rules will be extended:
- by transferring liability down the supply chain so that once a party fulfils its obligations, the liability transfers to the next party until such time as they fulfil their obligations.
- by transferring liability to compliant businesses in the supply chain if HMRC cannot collect outstanding tax and NICs from an entity for any reason (eg it has gone out of business).
Process for resolving status disputes: in acknowledgement that a worker may disagree with the client’s determination of their employment status, HMRC proposes that clients should be able to develop and implement a process to resolve disagreements based on a set of requirements set out in legislation.
Pension contributions: the government is considering legislation which will allow fee payers to make tax and NICs-free contributions to a worker’s personal pension.
The consultation will close on 28 May 2019 but organisations affected by the reform shouldn’t wait until the outcome to take initial steps to prepare. HMRC recommends taking the following actions now to prepare for the reforms:
- Identify and review your current engagements with intermediaries, including PSCs and agencies that supply labour to them.
- Review current arrangements for the use of contingent labour, particularly within the organisation functions that are more likely to engage off-payroll workers.
- Put in place comprehensive, joined-up processes (assess roles from a procurement, HR, tax and line management perspective) to get consistent decisions about the employment status of the people you engage.
- Review internal systems, such as payroll software, process maps, HR and on-boarding policies to see if you need to make any changes.