The off-payroll working rules are to be extended to the private sector on 6 April 2020. The rules require medium and large end-user clients to determine whether deemed employment status applies to their arrangements with relevant intermediaries (commonly personal service companies) supplying the services of individual workers to them. If deemed employment status applies, responsibility for deducting tax and employee NICs under PAYE in relation to that individual worker generally lies with the fee-payer as the “deemed employer”. The fee-payer is also liable for employer NICs and, if applicable, the apprenticeship levy.
The government carried out a review into the implementation of the proposed changes to the off-payroll working rules in the first 2 months of this year and published its report and conclusions on 27 February 2020. This report sets out further measures to address concerns raised during the review. This report links in with the HMRC new draft guidance in its Employment Status Manual (ESM) published on 7 and 27 February 2020. We report on key aspects of these measures and draft guidance below.
End-user clients: Requests for information about size
The new rules apply to medium and large clients; that is, any client that does not qualify as "small" For corporate entities, “small” follows the Companies Act 2006 definition and for other entities it means a turnover of less than £10.2 million. To assist workers and intermediate agencies to decide if the new rules apply to particular contracts, the government is planning to impose an obligation on clients to respond to information requests regarding their size from an agency or worker within 45 days, with court orders to enforce compliance.
Status determination and reasonable care
The new draft guidance in the ESM includes commentary on carrying out status determinations. Under the new rules, the client is obliged to make a status determination in relation to the individual worker. It needs to decide if the individual worker would be an employee, or self-employed, for tax purposes if the client engaged them directly. The client must take reasonable care when making the determination. If the client fails to take reasonable care, the liability for the tax, NICs and apprenticeship levy will fall on the client. If reasonable care is taken and the client has fulfilled his other duties (e.g. passing the determination on), HMRC have said that the responsibility for deducting tax and NICs will be transferred to the fee-payer, even if it turns out that the client got the determination wrong.
HMRC have published draft guidance on what constitutes reasonable care in carrying out a status determination. What will be reasonable will depend on the circumstances, but clients should act in a way that would be expected of a prudent and reasonable person in the client’s position. HMRC have said that they would expect a higher degree of care from large multinational companies with dedicated finance functions than from smaller companies. Examples of HMRC’s view of reasonable care set out in the draft guidance can be found here. They include, accurately completing HMRC’s Check Employment Status for Tax (CEST) tool and applying HMRC guidance on determining status. HMRC have also set out examples of behaviours which do not constitute reasonable care including applying a blanket determination across the entire contractor population without consideration to the specific facts of each individual case.
No penalties for errors for 12 months
HMRC has announced that, during the first 12 months of this new regime, it will not impose penalties for inaccuracies unless there is evidence of deliberate non-compliance. This should allow businesses genuinely attempting to adjust to the new regime some comfort, but is not a reason to ignore the new rules. Liability for the underlying tax, national insurance and apprenticeship levy is unaffected by HMRC’s approach to penalties.
Reassurance in relation to status pre April 2020
HMRC has reiterated its pledge that it will not use information under the new rules to open investigations for earlier tax years, unless HMRC has reason to suspect fraud or criminal behaviour. This provides reassurance to individuals that a “deemed employed” status and PAYE deductions under the new regime will not automatically lead to HMRC investigating their status prior to 6 April 2020.
Clarification on application to services carried out pre April 2020
As originally drafted, the new rules would apply to payments made on or after 6 April 2020, even if it related to work carried out prior to April 2020. HMRC confirmed on 7 February 2020 that the new rules only apply to payments for services carried out on or after 6 April 2020. If all of the services are provided before that date, the new rules will not apply to the payment (regardless of when it is made). If payment is made on or after 6 April 2020, in respect of services provided both before and after that date, a "just and reasonable" apportionment will be required. HMRC’s example suggests that this could comprise apportionment on a time basis.
Status disagreement process
The individual worker and fee-payer both have a right to disagree with the client’s status determination. If any representation of objection is received, the client must consider the reasons given and must respond within 45 days, either confirming its original determination along with stating its reasons for so doing, or reversing its original determination. Failing to meet its obligations within the 45 day deadline will result in the client having responsibility for making the required deductions and accounting/reporting to HMRC. HMRC has published detailed guidance on this process in its latest draft of the ESM.
Recovery of tax and NICs
The new draft guidance in the ESM includes information on what HMRC will do if they consider there is no realistic prospect of recovering tax, NICs and apprenticeship levy from the fee-payer/deemed employer. HMRC have confirmed that they will first seek to recover the amounts from the first agency in the chain if there is one (the agency that the client contracts with). If they are enable to recover from the first agency, they will seek recovery from the client. However, HMRC exclude seeking recovery from others where there is “genuine business failure” on the part of the fee-payer causing the failure to account in the first place, and the fee-payer has not knowingly benefitted from the failure as a result of winding-up without discharging the liability.