Off-payroll working rules from 2020: summary of responses

UPDATE: In light of the Covid-19 situation, the Government has announced a postponement of the reforms to the off-payroll working rules from 6 April this year to 6 April 2021. The Government is clear that this is a postponement and not a cancellation – and that the policy will be reintroduced next year. The delay comes amidst the Government’s latest announcement of a new package of support measures for businesses given the economic challenges of the Covid-19 outbreak.

UPDATE: For details of the further review of the implementation of these rules announced in January 2020, see Further review of the off-payroll working rules

HMRC has responded to feedback on its March 2019 consultation on implementation of the off-payroll working rules in the private sector from April 2020.

The Summary of Responses document confirms the approach to be taken by the government in relation to a number of detailed features of the extension of the rules putting the burden of operation IR35 on the client, including requirements concerning information provisions, status disputes and the ability of HMRC to transfer liabilities up the supply chain in cases of default.

Background

The IR35 legislation was introduced in 2000 to address the growing use of personal service companies (PSCs) to prevent an employment relationship arising.

By doing so, both worker and engagers gain potential tax advantages, including lower amounts of both NICs (for engagers and workers) and income tax. Under the IR35 rules, where the relationship between the worker and engager would have been one of employment in the absence of the PSC, IR35 ensures that the worker's income tax and NICs liability is broadly equivalent to that of an employee and imposes a PAYE and NICs obligation on the PSC.

However, the government became increasingly concerned that these rules were not working effectively and, as a result, in April 2017 introduced significant changes to make engagers in the public sector responsible for ensuring the correct operation of the IR35 rules.

Following the perceived success of the public sector reform, the Government published in May 2018 a consultation document, 'Off-payroll working in the private sector', which suggested extending the public sector approach to the private sector and this decision was confirmed in the October 2018 Budget, albeit restricting the reforms to large and medium businesses and delaying implementation until April 2020.

The reform will mean that affected businesses in the private sector will need to determine whether a worker is a deemed employee and, if so, account for tax and NICs on their payments. For further details, see “Off-payroll working in the private sector”.

In March 2019, the government issued a further policy paper and consultation providing further details of the proposed reform as well as consulting on some of the detailed provisions.

Details of this consultation can be found at 'Off-payroll working in the private sector: further policy paper and consultation'. This consultation closed on 28 May 2019 and the government has now responded to feedback.

Small entities

The paper confirmed that small companies (as defined in section 382 of the Companies Act 2006) will not be caught by the new rules and that the existing test in the Companies Act 2006 will be used for this purpose. As such, a company will be 'small' if it meets two of the following three requirements: an annual turnover of not more than £10.2m; a balance sheet total of not more than £5.1m; and not more than 50 employees.

The consultation response document now sets out how this test will apply to small non-corporate entities, such as partnerships. A simplified test will be used which will only consider turnover for a calendar year, such that only unincorporated businesses with a turnover exceeding £10.2m in a calendar year will be within scope of the rules.

The government has also decided that a company that ceases to be small will only be within the scope of the rules from the start of the tax year following the filing date at which it ceases to be small. For unincorporated businesses, the rules will apply for the tax year following the calendar year in which turnover exceeds £10.2m.

Supply chains: information requirements and non-compliance

The government has been keen to ensure that the extension of the public sector rules to the private sector operates with the minimum administrative burdens whilst taking into account the different considerations involved in the private sector (including longer labour supply chains). Two issues considered by the further consultation were information provisions requirements and transferring liabilities for unpaid taxes within the supply chain.

On the first issue, the government has decided that the employment status determination to be made by the client (together with reasons for the determination) should be passed both directly to the worker and down the supply chain to the immediate agency used by the client.

Intermediate links in the supply chain will be required to pass this information further down the chain to the ultimate entity responsible for paying the personal service company concerned.

In terms of non-compliance, the government has decided that the first agency used by a client has enough visibility of the supply chain to influence compliance. As such, it is appropriate that the consequences of non-compliance should sit with the first agency and the client.

The rules will, therefore, include provisions to transfer tax and NICs liabilities where there has been non-compliance in the supply chain and where it is not possible to recover the tax liability from the defaulting entity. HMRC will be able to transfer the liability to the first agency and then to the client.

However, the response document accepts that these provisions should operate in cases of deliberate non-compliance such as tax avoidance or evasion and not in cases of genuine business failure.

Therefore, the document states that HMRC will make clear in guidance the circumstances in which it will not seek unpaid tax liabilities from parties further up the supply chain. Clearly it would be preferable for this limitation on HMRC’s powers to be in the legislation itself rather than excluded by non-statutory guidance.

Status determinations

The consultation document put forward the inclusion of a client-led status disagreement process where both the ultimate fee-payer and the worker would have the right to request the determination and reasons for it from the client. Clients would be required to take reasonable care when making determinations and consider and respond to representations made by the worker and fee-payer.

Responses to the consultation were concerned that there remained an incentive for clients to be overly conservative and risk averse by favouring in-scope determinations and even providing blanket determinations covering a range of workers. However, the response document confirms the government’s view that the client remains the most appropriate entity to make the determination and respond to any concerns in real time.

The response document states that the government will legislate to set out the minimum requirements for the status disagreement process, including requiring clients to respond to representations.

HMRC will provide guidance on how a client can fulfill its duties in this regard. Failure to respond may even result in the client being liable for the tax and NICs liabilities. However, the response does indicate that applying a status decision to a group of workers with the same role, working conditions and contractual provisions can be appropriate.

Pension contributions

The response document considered allowing fee-payers to make contributions to a worker's personal pension, which would effectively be tax and NICs free. Feedback to this proposal indicated it would not be widely used and so the government will not take forward this aspect, though it will be kept under review during the passage of the Finance Bill.

Comment

The response document confirms that HMRC will to continue to work with stakeholders to deal with concerns in relation to the Check Employment Status for Tax (CEST) service. These include working to enhance the service, improving the guidance and developing an education and support package for affected businesses. The plan is for these reforms to be effected before April 2020.

Finally, the paper confirms that the Government agrees with the views expressed by Matthew Taylor in the Good Work Plan published in December 2018 that aligning employment status for tax and employment rights is the right ambition.

However, to do so will need careful consideration and will not be straightforward and that ambition should not prevent the government taking action now to improve compliance with the existing rules.