Draft Finance Bill clauses published on 11 July 2019, together with accompanying explanations and a policy paper, confirm changes to the off-payroll working rules with effect from April 2020. Rules introduced for public sector engagements from April 2017 will be extended to the private sector from next year although they will not apply where the end client is small, a population estimated at 1.5m businesses. The old IR35 rules will continue to apply to workers contracting with such clients through their own personal service companies (PSCs).
As proposed in the consultation published in March 2019, the rules for determining whether a client is small will rely on the small companies regime set out in Companies Act 2006. For non-corporates clients, the rules will be based on turnover alone (£10.2 million).
From 6 April 2020, medium and large organisations which use contract labour will need to consider whether the new off-payrolling rules apply. In doing so, they must review all contracts for work and make a status determination accordingly for each. This decision and the reasons for it must be passed to the first agency in any engagement chain and also to the worker directly. The information must be passed down the supply chain, from agency to agency, until it reaches the payer. There is no obligation for the payer to be informed directly by either the client or the worker.
ICAEW Tax Faculty made strong representations in ICAEW rep 54/19 that small client organisations should also be required to make their size clear to contract workers, who would then know with certainty that the status assessment was that worker's own responsibility. It is unfortunate that workers in such cases, who hear nothing, will not know whether it is because the client is small or that it has simply not made a determination. Communication is going to be critical.
A new status disagreement process is being legislated, enabling a worker or fee-payer to dispute a determination and the reasons on which it was based. Although the engager will be required to respond to a dispute within 45 days there is no independent review process being incorporated. The only sanction will be against a client who fails to respond.
Any outstanding liability for tax and NIC can be transferred up the chain to the top agency and then on to the engager if it cannot be collected from the fee-payer.
It is important to appreciate that the underlying rules for determining employment status are themselves unchanged. However, the subjective nature of their application and the attitude to risk of those involved may result in a different outcome for many who work through their own personal service company who could now find themselves being paid through a payroll.
HMRC has addressed this concern in an accompanying compliance statement Fact sheet published alongside the draft legislation, stating HMRC will not carry out targeted campaigns into previous years when individuals start paying employment taxes for the first time.
The Tax Faculty will be running a webinar to explain the new rules and their application in further detail on 7 August. We will also be publishing further details and guidance in due course. Why not Join the Tax Faculty today and access the Tax Faculty guidance already available on IR35 contract reviews and our recent webinar covering the latest IR35 cases. You do not have to be a member of ICAEW to join the Tax Faculty.