Extension of off-payroll working rules to the private sector

Tue 19 Mar 2019

HMRC has issued a further consultation on the operation of off-payroll working rules for the private sector. Responses to this consultation are requested by 28 May 2019.

From April 2020, medium-sized and large organisations (clients) being the ultimate users of  external workers will be required to make a determination of the workers’ employment status and communicate that determination to the contracting party. In addition, the fee-payer (usually the organisation, or client, paying the worker’s PSC) will need to make deductions for income tax and NICs and pay any employer NICs – where the worker’s status has been determined as ‘employed’.  However the “smallest” organisations will be excluded from these obligations.

As a reminder, Directors / office holders should always be put through the payroll regardless of this legislative change, unless ITTOIA 2005 s16B or CTA 2009 s40A (payments in respect of directors made to certain partnerships or companies) applies (see EIM02500).

Please get in touch with a member of the Mazars employment tax team to discuss the implications of this change and appropriate preparations for affected clients.

Proposed aspects of the regime

Size of business

The government has decided that the smallest organisations will not be affected by the reform, with small based on the existing statutory definition found at Companies Act 2006 s382:

The Companies Act qualifying conditions are met by a company in a year in which it satisfies two or more of the following requirements —

1 Annual Turnover not more than £10.2 million

2 Balance sheet total not more than £5.1 million

3 Number of employees not more than 50

Companies in small groups, as defined by section 383 of the Companies Act 2006, will also qualify as small for the purposes of the April 2020 reform.  The above figures apply to groups on a consolidated basis, though alternatively the turnover and balance sheet totals on a gross basis (i.e. without consolidation adjustments) cannot exceed £12.2m and £6.1m respectively.

The consultation proposes two options for applying these thresholds to unincorporated organisations:

• apply the reform to unincorporated entities with either 50 or more employees or to entities with turnover exceeding £10.2 million; or
• apply the reform only to unincorporated entities that have both 50 or more employees and turnover in excess of £10.2 million.

Note that the proposal applies employee limit at 50, when this limit would be within the ‘small’ definition for Companies Act purposes.  However this is in line with the way the employee threshold works in other areas of tax.

Communication of the determination

There are plans to legislate to ensure that the determination – and the reasons for that determination – are cascaded to all parties within the labour supply chain, to ensure they comply with their obligations.  One proposal is that the obligation only arises on a request from a party in the supply chain (for example the worker).  There are further questions asked on simplifying this process and on managing non-compliance.

To help deal with disagreements on determination of status, the Government plans to strengthen the existing rules by requiring the ‘client’ to directly provide the off-payroll ‘worker’ and the ‘fee-payer’ with the reasons for the status determination on request.  Procedures will be put in place for workers to request a determination if none is provided.

Treatment of the payment in respect of the worker and liability for tax and NIC

As is currently the case for engagements in the public sector, where the rules apply, the ‘fee-payer’ will be treated as an employer for income tax, NICs and Apprenticeship Levy purposes. The fee paid to the PSC is to be treated as a payment of the off-payroll worker’s employment income when it is paid. The amount treated as the off-payroll worker’s employment income will be the VAT exclusive amount paid to the worker’s PSC. For income tax, NICs and Apprenticeship Levy purposes, the worker will be treated as having an employment with the fee-payer.

The obligation to deduct income tax, NIC and pay employers’ NIC will initially rest with the person in the supply chain required to make the deduction.  However, where HMRC does not receive the tax and NIC, it is proposed that the liability will transfer back to the first party or agency in the supply chain.  The consultation indicates this would incentivise all parties to deal with reliable and compliant firms.

The off-payroll working rules will apply in priority to the managed service company rules and the construction industry scheme rules.  There are further points in the consultation on pension contributions, and also on how HMRC is working to improve its CEST tool.

HMRC recommended preparations

HMRC recommends that affected businesses prepare as follows:

1. Identify and review current engagements with intermediaries, including PSCs and agencies that supply labour to them;
2. Review current arrangements for the use of contingent labour, particularly within the organisation functions that are more likely to engage off-payroll workers;
3. 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 they engage;
4. Review internal systems, such as payroll software, process maps, HR and on-boarding policies to see if they need to make any changes.