In its ongoing effort to encourage compliance with IR35, HMRC have committed to introducing reformed legislation by 2020 to tackle what it views as off payroll workers. The reform was expected to happen sooner but as part of Budget 2018, the HMRC has pushed the reform out to 2020.
The reformed legislation aims to generate additional tax revenue for the HMRC by making employers responsible for collecting tax on contract workers who are deemed to be employees. The idea is to increase IR35 compliance by moving the burden from the service provider to the company receiving the service. Companies will then be responsible for collecting Income Tax and NI from contractors that they deem to be employees.
This mirrors changes that have taken place in the public sector since 2017. Initial evidence collected by HMRC suggests compliance has improved since the reform was introduced estimating that an additional £550 million was raised as a result of the reform in its first year.
Will all businesses be affected?
The legislation will affect only medium and large businesses and will not affect small businesses as defined in the 2006 companies act. (A small business is deemed to be one which meets at least 2 of the following: 1) annual turnover of not more than £10.2m 2) balance sheet of no more than £5.1m; or 3) average employees of no more than 50).
Who will be deemed to be off payroll workers?
Employers looking to see if contract workers should be treated as employees can use Check Employment Status for Tax (CEST) service to help them determine the treatment. The CEST portal has been somewhat controversial since its introduction with many people complaining about its results.
Impact on Employment Rights
When the new off-payroll rules were introduced to the public sector, HMRC was clear that “statutory payments and other employment rights are unaffected by the new legislation”. Based on the indication that private sector legislation will follow public sector the individual will still be the employee of the PSC for the purposes of employment rights and any statutory employment payments. It is worth seeking advice from legal solicitors if you have potential exposure to statutory employment payments.
We would advise companies who will be affected by the changes to:
1. Review any current contract workers providing services to the company and assess if any will be affected by the rules.
2. Communicate the changes to contractors who will be affected by the change. It will result in them receiving less money into their hand and potentially paying more tax so it is important to communicate this change to them in a timely manner.
3. The checks used to identify off payroll employees at the outset should be introduced as part of the companies recruitment and on-boarding service.
4. Specific details of how this will work have not yet been released by the HMRC. However, it is likely that companies will need to add workers deemed to be off payroll employees to a payroll to calculate and tax and NI and then adjust payments to the PSC and make according payments to the revenue. There may also be an additional costs to business as they will need to pay over Employers NI. See the payroll services we provide.
There will be further consultation and HMRC will be releasing more detail on the operation of the new rules in the near future.