Much has been said about the upcoming changes to off-payroll working (IR35) in the private sector over the past 18 months or so – see our notes on 4 July 2019, 8 January 2020 and 18 March 2020. In response to the COVID-19 pandemic, the UK government announced in March 2020 that the changes would be delayed until April 2021. The new launch date is now less than three months away. All businesses, regardless of their position in the labour supply chain, now need to get IR35-ready.
The forthcoming private sector IR35 rule changes fundamentally alter the current position on responsibility for PAYE liabilities when labour is provided through an “intermediary” (usually a personal services company, or PSC). Aside from cost implications, integrating the changes into existing working processes is also likely to require administrative time and effort.
What is changing from 6 April 2021?
Medium and large private businesses with a UK connection that receive worker services through an “intermediary” (usually a PSC) will be responsible for determining whether the worker is a deemed employee of the business for tax purposes. That status test itself will not be changed by the new rules; more details of this can be found in our note here. Usually the first port of call for determining worker status is via HMRC’s CEST tool (though this is not always conclusive and does not cater for all aspects of the status test). Businesses are required to take reasonable care in making an assessment.
Where the worker is categorised by the client business as their deemed employee, the new rules will determine who in the services supply chain is responsible for operating PAYE on the fees charged by their PSC. That includes paying employer national insurance contributions (13.8%), apprenticeship levy and reporting to HMRC. In the first instance, the responsibility for PAYE sits with the client until the employee status determination is passed to another qualifying intermediary in the chain as the “fee payer”. Liability can potentially rebound back to a client if HMRC are unable to recover amounts due from the fee payer.
With less than three months to go until the new rules take effect, now is the time to:
- Familiarise yourself with the new rules and your responsibilities (whether a client business, agency or worker). Though the new rules are clearly intended to be largely self-regulating, HMRC have shown their appetite to litigate IR35 in recent times.
- Audit all relevant labour supply for arrangements that may be within scope of the new rules.
- Analyse the cost implications for positive employee status – employer national insurance contributions (13.8%) is likely to be the largest financial outflow that will need to be borne by the supply chain, along with general compliance and administrative costs.
- Decide on your overall strategy – is the supply of services via a PSC still the best option all round, or are there alternatives to consider (for instance engagement via an umbrella company that deducts PAYE, or direct employment of the worker)?
- If the supply of worker services via a PSC is to continue post-6 April, what action needs to be taken to prepare for the new rules? Information to help determine status needs to be obtained and a status determination made. Contractual agreements are likely to need amending to accommodate the new legal requirement to make deductions and provide for appropriate indemnification. Staff may need training. Internal payroll systems and processes are likely to require updating.
- Begin a communications exercise with relevant stakeholders.