The State of Status – The Finance Bill and Off-Payroll Working in the Private Sector

Wed 17 Jul 2019

The Finance Bill was published on 11^th July. It was eagerly anticipated, mainly due to an expected update on how the off- payroll working rules introduced to the public sector in April 2017 were to be extended to the private sector, following the recent consultation.

So what happened?

Despite rumours and parliamentary questions seeking a delay, the expectation that the rules would be extended to the private sector from April 2020 were confirmed. This means that for payments made and contracts entered into on or after 6 April 2020, organisations in the private sector classed as medium and large will be required to determine the employment status of individuals engaged via Personal Service Companies (PSC).

In a nutshell this means, that, like when engaging individuals directly, the fee-payer of the PSC will be liable for unpaid income tax and NIC should HMRC successfully challenge the worker’s employment status.

The Government has estimated that this change will increase tax revenues by £725m by 2023/24. Therefore, they consider that there is widespread non-compliance in how individuals are currently engaged off-payroll.

Who is affected?

• Medium and large organisations outside the public sector that engage with individuals through PSCs;
• Recruitment agencies and other intermediaries/organisations in the supply chain who provide workers via PSCs;
• An estimated 170,000 individuals who currently provide their services via an intermediary (e.g. PSC) and who HMRC may deem to be employed if engaged directly; and
• Public sector organisations given the proposed changes to the disagreement and sharing of determination process.

What didn’t happen?

How employment status is fundamentally determined for tax purposes has not been changed by the Finance Bill in any way. In fact, the Government and HMRC have not yet responded to the Employment Status consultation (which has come out of the Taylor Review and The Good Work Plan – we analysed this here) that closed over 12 months ago (they are still “analysing feedback” – https://www.gov.uk/government/consultations/employment-status). This seems to be a great concern, given that:

• There have been a large number of reported employment status cases where HMRC have been defeated in tribunals recently (from Lorraine Kelly to football referees);
• As set out in the responses to the Finance Bill and the Off-payroll Working regulations for the private sector, there is a renewed focus on improving, (or fixing) the Check Employment Status Tool (CEST) given that it does not currently seem to assess status accurately (as shown by the tribunal decisions).

Indeed, the CIOT has responded quickly, outlining that:

“If businesses are to make the correct decisions on whether the off-payroll rules apply then CEST will need to be significantly improved. While HMRC is looking to enhance CEST to ensure it works more effectively, and will be engaging with stakeholders to test these enhancements, it is only undertaking to roll out the new service before the new off-payroll working rules are introduced next April. However, businesses are already making decisions on contracts and projects that will extend beyond next April and they, and their contractors, need to know urgently how those contracts will be taxed from April 2020.  So we think that the improved CEST tool needs to be ready by October 2019 at the latest so that new and existing contracts can be reviewed by April 2020.

Until CEST takes proper account of mutuality of obligation, multiple engagements, contractual benefits – such as holiday pay, maternity/paternity pay – and whether someone is in business on their own account, it is unlikely it will be able to reach the right decision on status. And this is key because otherwise the lack of confidence in CEST will increase disputes between businesses and contractors and so lead to significant time and effort having to be expended by businesses, contractors, HMRC and the courts in trying to resolve them.”

The focus on CEST to give fairer judgement and consider Mutuality of Obligation and Control as the tribunals have been doing will be critical in ensuring employment status assessments are more reasonable. However, it should be noted that organisations are not required to use CEST should they not wish to and it is generally appropriate to seek advice and further assessment to demonstrate robust processes are in place.

HMRC has indicated that its ‘CEST’ will be enhanced and that they will be testing these enhancement more rigorously. In addition HMRC has indicated that organisations will receive “extensive support and guidance” prior to April 2020. What this support and guidance looks like will be critical.

What is different to when this was introduced to the public sector in April 2017?

The Finance Bill does include:

1. Provisions to ensure that all parties in the ‘client’ organisation’s decision on employment status is communicated to the worker (along with a reason for its conclusions), and that the worker informs the fee payer. ; and
2. A statutory, client-led status disagreement process to allow individuals and fee-payers to challenge the organisation’s determinations.

It has been acknowledged that introducing these off-payroll working rules (or changing who is responsible and liable should HMRC disagree with a determination), requires discussion across potentially complex chains and that workers who provide their services via a PSC can appeal their end-client’s employment status decision in an official manner.

Additionally, it will be important that organisations do not make blanket decisions and look to review engagements on a case-by-case basis, with robust processes and controls in place. Public Sector bodies will need to update their processes to ensure they comply with this change also.

Problems

• How will PSCs know they are engaging with a medium / large business? How will businesses keep on top of whether they are small (outside the scope) or medium / large? This does seem an obvious area to highlight as it will cause confusion and concern. The qualify as “small”, companies or LLPs will need to meet two out of three of the following:

1. Annual Turnover not more than £10.2 million;
2. Balance sheet total not more than £5.1 million; and
3. Number of employees not more than 50.Where a business that previously provided an employment status determination, falls below the above thresholds, it is required to withdraw the employment status determination.

An organisation that is not a company or LLP will need to meet just the turnover threshold above.  When assessing whether these thresholds are met, businesses will need to take into account the relevant figures from connected persons.  There is no requirement for the businesses to be connected in an economic sense for this purpose, so unrelated businesses run by connected persons will impact the assessment of the threshold test.  The meaning of connected could being into account the whole of a partnership’s turnover of a relative who is a partner in that partnership.

• Will small businesses and PSCs then not worry at all and will HMRC care about engagements with small businesses? Strictly, the position with small businesses remains as it is now, with the PSC responsible and liable for determining employment status but does this shift in focus and the distinction between small, medium and large open up a rift in risk assessment and HMRC focus?
• How will fee-payers / determiners communicate and correspond to share the employment status decision made, and who will be responsible for this within an organisation? HMRC has stated in its response to the consultation that the client (end customer) will become liable for the PAYE/NIC if they refuse to cooperate as part of consulting on a decision made. This will not alter where the liability falls when the chain only includes a PSC and an individual, but may be more pertinent where there are others in the chain, including an agency / other intermediary making payment to the PSC. Will engagers look at removing the risk here by hiring directly through payroll, rather than having to have administrative determination processes to say whether an individual is caught or to challenge that it is not caught? Additionally, if the PSC is paid off-payroll but is unaware whether the engaging party is medium or large, will they then feel at risk and need to do an assessment themselves?
• What about employment law? As these rules only mean income tax and NIC (and Apprenticeship Levy) become payable, will more individuals operating through a PSC want to become employed, seeking worker rights like pension, holiday, sick pay etc? This remains an area of challenge, particularly as employment tax and employment law are not aligned for status and there have been various, well publicised workers’ rights tribunals recently (Pimlico Plumbers, Uber, Deliveroo).
• Given the limited update on contracted out services, it will be important to assess whether the off-payroll working regulations apply or whether the services have been “contracted out”. This can mean that responsiblity for the employment status determination changes depending on how the service has been provided. However, organisations trying to avoid the off-payroll rules by structuring engagements differently will need to be mindful of the Managed Service Company provisions and anti-avoidance legislation which catches changes to existing arrangements so that the “new” arrangements would fall outside of the legislation.

Next steps

We are helping clients identify, review, establish clear roles and responsibilities and enhance controls to manage the employment status determination approach.

All businesses (including small) should consider their controls given that they may have engagements with individuals directly and via intermediaries like PSCs. They should also assess their supply chain where they may be other parties in the chain who engage with individuals and PSCs. This is particularly important given broader legislation that could take priority to the off-payroll working regulations – Managed Service Company provisions, Construction Industry Scheme, Agency Legislation and wider aspects like the facilitation of Tax Evasion and Modern Slavery Act.

If you’d like to discuss this further, please do get in touch with a member of the Mazars employment tax team.

The PSC/Worker should be asking for confirmation of employment status as part of its contract arrangements.  The ‘client’ would need to provide an employment status determination if within scope.  If the ‘client’ does not, the PSC/worker will need to operate IR35 – unless they have very good supporting information that the ‘client’ is not small.