Private Sector Off-Payroll Working Rules: Changes from 6 April 2020

From 6 April 2020, when workers provide services through intermediaries such as personal service companies, medium and large private sector employers will join the public sector in taking responsibility for determining workers’ tax employment status. Employers will have to assess whether the worker is an employee for tax purposes and, if necessary, withhold income tax and NICs. This will affect a wide range of employers who engage contractors on various terms and failure to comply could result in unexpected tax liabilities.

Current Regime (pre-April 2020)

Under the current regime, known as IR35, it is the responsibility of the intermediary (for example, a contractor’s personal service company) to assess the notional employment status of the worker (i.e. the contractor) and, if necessary, account for employment income tax and NICs accordingly. The notional employment status is the status which would prevail if the intermediary was not in the structure.

New Regime (post-6 April 2020)

From 6 April 2020, under the new off payroll working rules, the responsibility to assess a worker’s employment status shifts to the end user of the services (the “End User”) and, where appropriate, the responsibility for accounting for employment income tax and NICs shifts to the party who pays the fees for the services provided by the worker (the “Fee Payer”). The End User and the Fee Payer may be the same entity, or, in more complex structures, they may be different entities, such as where payments for services are routed through an agency.

While this regime has applied to End Users / Fee Payers in the public sector since 6 April 2017, its application will extend to medium and large private sector End Users / Fee Payers from 6 April 2020. A private sector End User / Fee Payer will fall within the new rules if two or more of the following criteria (as provided for at s.382 of the Companies Act 2006) apply:

• it has an annual turnover of more than £10.2 million;
• it has a balance sheet total of more than £5.1 million; and/or
• it has more than 50 employees.

Under s.383 of the Companies Act 2006, a parent company qualifies as a small company in relation to a financial year only if the group headed by it qualifies as a small group (applying the same criteria as above).

How the new rules will work

An End User will be required to make a status determination statement providing reasons for whether it considers a worker to be a notional employee and communicate this to the worker and, if a different entity, the Fee Payer.

Although it is primarily the Fee Payer’s responsibility to withhold employment income tax and NICs, the End User may be liable if it has failed to undertake a status determination, failed to take reasonable care in determining the worker’s notional employment status, failed to pass on the status determination to the Fee Payer or if it does not have a dispute process in place whereby a worker’s employment status can be re-considered within 45 days of a worker raising a dispute.

In addition, End Users and Fee Payers may become secondarily liable if HMRC are unable to recover any tax due from a relevant party in a chain, although they may have fully complied with their own obligations.

If an End User determines that a worker should be treated as an employee for tax purposes, the Fee Payer will be required to withhold income tax and NICs at source and account for employer NICs.

For example, if a contractor is engaged through a personal service company by a medium or large private sector company and the End User has determined that the way in which the contractor provides services has the characteristics of an employment relationship, the Fee Payer, whether this be the company or an agency through which the company has engaged the contractor’s personal service company, must deduct the relevant income tax and NICs and pay the contractor’s personal service company a net amount. Therefore, for every £100 that the Fee Payer owes the personal service company, it must withhold the relevant rate of income tax and employee NICs and pay £13.80 in employer NICs.

Some steps to prepare for the new regime

As a priority, Fee Payers should review all existing contracts which they have with intermediaries.

All new contracts entered into should contain suitable provisions to ensure that, in the event of a contractor being assessed as a notional employee for tax purposes, the Fee Payer is permitted to pay a net amount equal to the agreed contract rate less income tax and NICs in substitution for the agreed contract rate.

Given that parties may be secondarily liable for the failings of other parties in a chain to comply with the new requirements, contracts should require all parties to comply with the new rules and include full indemnity protection for any liabilities which may transfer.

End Users should prepare to undertake status determinations in relation to off payroll workers and to provide these to all parties in a chain.