The UK government is changing the off-payroll working rules on the tax treatment of certain contractors. The changes will affect clients who are medium to large businesses using contractors that provide their services through an intermediary – usually a personal service company (“Intermediaries”). The changes are significant as they could result in tax liabilities for businesses using contractors in this way. The advice below identifies the steps to be taken to achieve compliance with new rules.
What are the Off-Payroll Working (IR35) Rules?
The aim of the rules is to curtail tax avoidance by contractors who may avoid paying income tax and/or National Insurance Contributions (NIC) by providing their services through Intermediaries. The new rules require businesses using contractors via Intermediaries to assess the arrangement and make a determination as to whether it is a genuine client/contractor relationship or, in reality, an employment relationship with PAYE obligations. Businesses will be required to review the relationship and to confirm its view of the status of the contract by providing the contractor with a ‘Status Determination Statement (‘SDS’). Businesses, not the contractor or the Intermediary, will be responsible for any PAYE liabilities if a determination of employment is made. The start date of the new rules has yet to be confirmed but it may be as early as 6 April 2020.
Small business exemption to the rules
Clients must meet two of the following three criteria to benefit from the small business exemption to the rules:
- Annual turnover is no more than £10.2 million
- Balance sheet total is no more than £5.1 million
- No more than 50 employees
If your business meets two or more of the above criteria the new rules will not apply.
Managing the risks
To manage the forthcoming changes clients should start to take steps to assess the proper status of their existing contracts without delay. These steps should include a review of existing contracts and working practices and, where necessary, making appropriate changes to reflect that contractors are self-employed. HMRC’s online CEST employment status tool may be of some assistance though we note the tool is the subject of substantial criticism and is presently under review. If you are in doubt, seek a specialist review of your existing contractual arrangements by our employment team. This will also assist with showing HMRC that you have taken reasonable care in assessing the status of contracts in the event of an investigation.
Clients will also need to establish a disagreement process allowing contractors to object to a status determination. The process should involve a review mechanism and responses to be provided within prescribed time scales. Our employment team can help clients set up an effective and compliant disagreement process.
Our Employment department, led by co-heads and Partners, Ewan Keen and Tamara Ludlow are on hand to assist our clients and contacts with the necessary preparations for compliance. If you or your organisation require such assistance or would like to be kept up to date with developments, please do not hesitate to get in contact.