Broking Business Summer 2021: Green light for off-payroll working changes
IR35 is finally upon us. Our employment taxes expert Daniel Kelly recaps on the new legislation.
Any hopes for a further delay to the introduction of off-payroll working (known as IR35) rules were dashed in the March budget. They will come into effect for medium and large private sector organisations on 6 April 2021. It’s important to remember that the rules for corporate entities apply equally to entities classed as ‘relevant undertakings’. These include limited liability partnerships, overseas companies and unregistered companies.
For consultants engaged via their personal service company (PSC), the obligation to assess the employment status of that engagement moves to the end user organisation (the company receiving the consultant’s services).
Where that status is assessed to be ’employment’, all payroll obligations and NIC liabilities move from the consultant’s PSC to either the end user or the intermediary who pays the PSC.
The new rules significantly increase the compliance burden and potential risks associated with engaging contractors. The work required should not be underestimated.
Insurance intermediaries use external consultants on a regular basis and many of these relationships may well initially be outside of IR35. However, as with all business relationships, the connection with a contractor may develop to become more regular and dependent. Therefore this is a risk that requires constant monitoring, and not only upon initial engagement.
How to assess employment status
Organisations must assess the employment status of a contractor “with reasonable care”, formally documenting their assessment using accepted employment status indicators in a status determination statement (SDS).
This may mean investing in training for those completing SDSs or seeking support from a third-party advisor more familiar with the subjective nature of employment status.
HMRC’s CEST online tool is expected to be the most popular way for organisations to complete the assessments. But problems remain with the assessments made by CEST and many organisations are instead using one of the many independent assessment tools on the market.
In particular, it should be noted that CEST does not consider sector specific requirements. For an intermediary, subject to FCA regulation, certain roles and obligations carried out by contractors may imply a greater level of control, and risk of capture under IR35 than other businesses.
Why your supply chain matters
The new rules apply regardless of whether you directly contract with a contractor’s PSC or via another intermediary. If there’s a PSC in the labour supply chain, the end user organisation must complete an SDS.
Where other intermediaries are involved in the supply chain, an end user is only obliged to communicate the SDS to the contractor and the first intermediary in that chain. Payroll and NIC obligations rest with the last intermediary in the chain – who pays the PSC.
Where the services of a contractor involve a chain of intermediaries, the end user organisation may not even know a PSC is being used. So understanding the labour supply chain is going to be vital for compliance.
What if there is disagreement?
End users must complete an SDS and send it to the contractor and any intermediaries in the supply chain before the first payment for services under the engagement is made. Contractors and/or the intermediary deemed to be the employer (who pays the PSC) can dispute the employment status assessed by the end user.
Organisations must have a process for dealing with disputes within 45 days of receipt. They aren’t obliged to change their assessments if disputed, but should re-visit the original SDS in light of any new information or documentation provided.
What does ‘small’ mean?
It’s important to note that small businesses are exempt from the legislation, and won’t need to apply the new off-payroll working rules. A business is small if it meets two of these three criteria – considered on a global consolidated basis. Note that if an Insurance intermediary recognises client money on balance sheet on a Gross basis, these assets will be considered as part of Gross assets for this test, potentially breaching the threshold tests for an otherwise small business.
Annual turnover less than £10.2million
Gross assets less than £5.1million
Fewer than 50 employees
It’s the size of the end user organisation that is relevant for the application of the new rules, but not so for the contractors themselves. Where the end user is a small company, the contractor and their PSC will continue to be governed by the existing legislation which places all obligations for assessing employment status and operating payroll, where necessary, on the PSC.
Contracting consultants directly
One point which seems to have been lost is that the new rules do not apply to contractors who are engaged directly, not through a PSC. It has long been the case that the engaging company assesses the employment status of the contractor and operates payroll where appropriate. These rules remain unchanged.
For more information about the issues covered in this article, please contact our team