HMRC ‘s proposals to reform off-payroll working in the private sector will have significant impact for businesses
Private sector organisations who engage the service of individuals off-payroll are likely to already be aware of the private sector off-payroll working rules, commonly known as the IR35 regime.
The IR35 regime applies where an individual provides their services (directly or indirectly) through a personal service company (a “PSC”) to another person or entity (an “End-User”) in circumstances where, had the individual provided their services directly to the End-User rather than through their PSC, they would have been an employee (or office-holder) of the End-User. Under the current IR35 regime, it is the responsibility of the PSC to determine whether the regime applies and, if so, to account for income tax and national insurance contributions through the PAYE system on a deemed payment of employment income (the “IR35 Liabilities”). Importantly for End-Users, under the current IR35 regime, no obligations are placed on the End-User, and the liability of the PSC to account for the IR35 Liabilities cannot be transferred to the End-User.
The government announced at Budget 2018 that, with effect from 6 April 2020, changes would be made to the current IR35 regime, bringing it in line with the rules applicable to the public sector which, since April 2017, has been subject to a separate off-payroll regime. On 5 March 2019, HMRC issued a policy paper and consultation document (the “Consultation Paper”) aimed at providing more certainty to the parties in labour supply chains regarding how the new IR35 rules will work, along with details of their respective obligations and responsibilities under the new regime.
Whilst the Consultation Paper confirmed that the basic premise of the IR35 regime is not changing i.e. that it will continue to apply to cases of ‘disguised employment’, it has also confirmed that the new regime applicable to the private sector will, as a starting point, be based on the public sector regime. This will mean that:
- End-Users will be required to make a determination of an individual’s employment status and to take reasonable care in arriving at that determination; and
- Generally, the organisation in the supply chain which pays the PSC (a “Fee-Payer”) will be required to include the individual on their payroll and account for the relevant IR35 Liabilities on the payments made to the PSC.
In addition, the Consultation Paper has set out a number of proposals which build on the existing public sector regime (and which, if adopted, will also apply to the public sector regime). These proposals include:
- A requirement on the End-User to provide their determination to both the party they contract with in the supply chain and directly to the individual worker themselves;
- Each subsequent party in the supply chain (after the End-User) will also have an obligation to pass on the determination of the End-User to the party they contract with in the supply chain, until that determination reaches the Fee-Payer in the supply chain;
- Where any party in the supply chain does not comply with their obligation to pass on the determination, the relevant IR35 Liabilities will stop at the defaulting party, and will not pass to the Fee-Payer;
- Where HMRC is unable to recover amounts from any party in the supply chain which has the obligation to account for the relevant IR35 Liabilities, those liabilities will be immediately transferred to the first party or agency in the supply chain (i.e. that which the End-User contracts with), and if recovery is not obtained from that party or agency, it will be transferred to the End-User; and
- The End-User will be required to put in place a process for the resolution of any disagreements relating to any status determinations.
Given the potentially significant impact that these reforms will have on End-Users, Fee-Payers and any other party or agency which sits within the supply chain supplying the services of the individual to the End-User, it will be important that all such organisations take advantage of the time available prior to 6 April 2020 to fully prepare for their introduction.
As a starting point, all such organisations will need to review the nature of, and their role in, any existing off-payroll engagements to determine which are likely to fall within the scope of the reforms, which will provide them with an understanding of the potential impact of the reforms. It likely that any affected organisation will have to implement significant changes to existing arrangements and internal systems and processes, as well as assessing the impact of any additional tax (and other costs) which may arise as a result of the reforms – and sufficient time should be allowed for undertaking this exercise. In particular, End-Users will be required to ensure that adequate internal systems and processes are implemented to ensure compliance with their obligations under the new IR35 regime.