From April 2021, the burden for determining the employment status of an individual providing services via a personal service company (“PSC”) will generally shift from the PSC to the engaging company or business. What are the implications of these changes to the engaging company?
Since the introduction of PAYE back in 1944, an employer has generally had the obligation to deduct income tax and National Insurance Contributions (“NICs”) from wages paid to its employees. By contrast, self-employed contractors who provide services can be paid gross and are responsible for accounting for their own tax and NIC.
It can be difficult to determine whether the relationship between the two parties is one of employer/employee or self-employment. Its determination depends on a number of factors that are beyond the scope of this note; our article here has further information. However, where services are provided via an intermediary company, the “IR35 rules” have historically placed the burden on accounting for any employment taxes due on the PSC. Thus the engaging companies have, in such circumstances, been able to pay the PSC gross without any need to consider the relevant employment status of the provider.
Since 6 April 2017, changes were made to these rules where an individual’s services are provided via an intermediary to an organisation in the public sector: the burden of determining employment status and accounting for employment taxes now rests with the engaging organisation in such cases.
From 6 April 2021 (deferred from April 2020 because of the coronavirus outbreak), the April 2017 rules are to be extended to the private sector. This therefore places additional responsibilities on engaging companies, both to determine the employment status of contractors and where they are deemed to be in an employer/employee relationship, to account for PAYE and NICs as set out further below. There is an important exception from this change where the engaging company is “small”, as explained below.
How should businesses prepare?
- Your business should undertake a review of their current workforce (including those engaged through agencies and other intermediaries) to identify those individuals who are supplying their services through personal service companies.
- You should start talking to contractors about whether the off-payroll rules apply to their role.
- It is then necessary to determine if the off-payroll rules apply for any contracts that will extend beyond April 2021. You can use HMRC’s Check employment status for tax service to do this or of course seek our advice! These changes do not impact on the factors to be taken into account in deciding whether a particular relationship falls to be treated as one of employment or otherwise.
- Processes should then be put in place to determine if the off-payroll rules apply to future engagements. These might include who in the organisation makes a determination and how payments will be made to contractors within these off-payroll rules.
Status Determination Statement
As above, the “end user” who actually uses the services will be required to decide whether a particular engagement does or does not fall within the scope of the rules – that is, whether, if the contract had been made direct between the end user and the individual, it would have been a contract of employment.
The decision and the reasons for arriving at it must be set out in a Status Determination Statement (“SDS”), a copy of which must be given to the individual worker (and to the person with whom the end user contracts).
If the SDS states that the notional direct contract would have been one of employment, the fee-payer is required to deduct tax and NIC (using tax code D0 or OT) from the payment (exclusive of any VAT) and pay it over to HMRC along with their normal monthly payroll.
Where the worker is engaged via an agency, the obligation to account for PAYE and NIC falls on that party as the organisation in the supply chain making the payment to the PSC. However, it remains the responsibility of the end user to determine the worker’s employment status.
Client-led disagreement process
If the individual whose services are being provided via the PSC disagrees with the decision of the end user, they can invoke what is described as the “client-led disagreement process”. Under this, the end user may be asked to reconsider the decision and to notify the results of the reconsideration (either confirming or withdrawing the decision that the rules apply) within 45 days. There is, however, no separate independent appeal process.
Exception for small businesses
If the contractor’s assignment is with a small business (broadly as defined by the Companies Act (see below) with appropriate modifications for non-corporate businesses) then the new rules are not relevant. Instead the current “IR35” rules continue to apply to the PSC and the fee payer will not be required to make any deduction on account of tax or NIC. To be exempt from the new rules, a company must accordingly satisfy at least two of these three conditions:
- Annual turnover – not more than £10.2 million
- Balance sheet total – not more than £5.1 million
- Number of employees – not more than 50
Other points of the rules
- The new rules will apply in respect of services rendered after 5 April 2021.
- To avoid double taxation, the PSC treats the deemed salary from which PAYE has been deducted as a tax allowable expense in its own accounts. Furthermore, the tax so deducted can be credited against any income tax liability arising on dividends or salary paid out of the PSC.
These rules shift the burden for determining whether a contractor should be paid under PAYE from the PSC to the engaging company. They are scheduled to take effect from 6 April 2021 and apply to all non-small businesses that engage external workers.
Your business should start taking action now to ensure that you are in position to identify deemed employees and account correctly for any tax and NIC due under these new rules. Mistakes can be costly. If you need any further information, we would be pleased to help: please get in touch using our enquiry form.