This legal update was originally published on 25 February and has been updated following the Government’s decision to delay the changes until 2021. On 17 March 2020, the Government announced that these measures will be delayed by a year, to 6 April 2021.
From 6 April 2021, the tax rules applicable to off-payroll individuals working through intermediaries in the private sector are due to change. Under the new rules, large and medium sized businesses will be required to determine the employment status for tax purposes of individuals engaged to provide services to them through an intermediary. If the individual is deemed employed, the entity paying the intermediary (the ‘fee-payer’) will have to operate PAYE as if the individual were an employee, deducting tax and National Insurance Contributions, as well as paying employers’ National Insurance Contributions. The Government is currently reviewing the implementation of these changes, but it is unlikely that they will be delayed or significantly revised.
The ‘old’ IR35 rules
The IR35 rules apply to engagements where individuals work on a purportedly ‘self-employed’ basis by contracting to provide their services to client companies indirectly (usually through their own personal service company, or PSC), rather than becoming employees of that client company. Under these ‘old’ IR35 rules, which will still apply where services are provided to small company clients, the individual’s PSC is required to account for any tax due if the individual is deemed to be an employee for tax purposes.
The ‘new’ rules from April 2021
From 6 April 2021, when individual service-providers provide their services to large and medium-sized clients via PSCs, agencies or other intermediaries, the responsibility for working out whether they are employed (for tax purposes) and for operating PAYE if they are deemed employed will move to the end-client. The end-client must provide that person with a status determination statement.
If an individual is deemed to be employed for tax purposes, PAYE will have to be operated by whichever entity pays the intermediary for the individual’s services. This entity, the ‘fee-payer’, may be the end-client or will be an agency in many cases.
The new rules only apply to medium and large companies (broadly, companies that are required to be audited). To qualify as ‘small’ (meaning the old IR35 will continue to apply), a business must meet at least two of the following conditions in the relevant tax year:
- turnover of not more than £10.2m
- aggregate assets on the balance sheet of not more than £5.1m; and
- not more than 50 employees.
Note, connected persons must be taken into account in determining whether a company qualifies as ‘small’. This is defined by reference to the Companies Act 2006 and means that a subsidiary of a group will not be regarded as ‘small’ unless the group itself fulfils the criteria.
Deemed employment (for tax purposes)
To establish whether the individual will be deemed employed for tax purposes, there are a number of legal tests established in case law. In applying these tests, courts and tribunals will consider what is written in the contracts as well as how the relationship operates in practice. The main factors taken into account when determining status are:
- mutuality of obligation (is the individual required to provide the services in return for remuneration?)
- personal service (is the individual required to provide the services personally, or is there a genuine right of substitution?)
- control (does the end client exercise a significant degree of control over the way in which the services are performed?)
HMRC has issued what it claims is an improved ‘Check Employment Status for Tax’ (CEST) tool on its website and although there is no obligation to do so, many will use the CEST tool as their default method to determine status.
Status determination statements
The end-client will be required to:
- provide the worker (and whichever entity the client is contracting with, for example the agency or PSC) with a status determination statement; and
- give the reasons behind that determination.
Until the status determination has been carried out and the status determination statement has been provided to the individual worker (and any agency or fee-payer), the responsibility for operating PAYE and deducting and withholding income tax and NIC remains with the end-client. Similarly, if another party in the chain fails to pass on the status determination, that party will bear the initial liability for the PAYE and NIC, if it should have been paid.
The end-client is required to take ‘reasonable care’ when making the status determination. The Government has published draft guidance on what is meant by ‘reasonable care’, designed to prevent end-clients from making blanket status determinations rather than considering each situation separately, on a case-by-case basis. Using the CEST tool will satisfy the requirement for ‘reasonable care’ provided the answers given are not inaccurate or misleading.
In addition, the end-client will be required to operate a process for dealing with disputes over the status determination. If the individual worker (or agency) make representations to the client that they disagree with the status determination, the end-client will need to decide within 45 days of receiving notification whether to uphold the determination or alternatively, to provide a new determination, giving reasons why.
The Government has published draft regulations providing that each party in the chain will bear a secondary liability, meaning that they could be pursued by HMRC for amounts that are unpaid by another entity in the chain primarily responsible for paying it.
A fee-payer making payments to a deemed employed individual under the new rules, in respect of services provided on or after 6 April 2021, will have to pay the additional cost of 13.8% employer’s NIC (and potentially 0.5% Apprenticeship Levy) on top of the payment it was expecting to make to the intermediary before the changes to the rules.
If the fee-payer fails to operate PAYE and the fee-payer entity is an agency, or any other entity in the chain between the client and the PSC, then the end-client (or other parties in the chain) may be held liable to HMRC for the unpaid employer’s NIC (and Apprenticeship Levy, if applicable).
The level of payments agreed under pre-April 2021 contracts will not reflect the added cost, therefore fee-payers (and clients) may want to terminate existing contracts and enter into new contracts that reflect the additional cost of employer NIC to be borne by the fee-payer. This could be done by reducing the level of the payment to the worker, or increasing the charge to the client. Alternatively, a worker may abandon use of his intermediary PSC and opt to be employed directly.
Contracts may also need to deal with the potential risks highlighted under the headings above, by including indemnities for the benefit of the contracting parties.
Note that deemed employment for tax or IR35 purposes does not equate to an entitlement to statutory employment rights. If a contractor is deemed employed for the purposes of IR35 rules, they will not automatically benefit from rights such as protection from unfair dismissal, holiday/sick pay or pension contributions. However, being deemed employed for tax purposes may result in more claims to establish employment status.
In need of any further information? The Birketts tax team is now advising businesses on how to deal with these changes. If you require any further advice, please contact Liz Stevens.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at March 2020.