Employee status and off-payroll working rules are changing from April 2020, affecting those working through individual personal service companies
Revised off-payroll working rules attempts to ensure that where, bar for the insertion of the intermediary company, the worker would be an employee that they are taxed in that manner
To date the test as to whether there is a fundamental employee/employer relationship has rested with the worker when they have filed their company tax returns. That position changed for contractors in the public sector from 6 April 2017 where the onus on determining status changed to be the responsibility of the “employing” body.
A government consultation on the application of these rules to the private sector due to be introduced from April 2020 has just closed. There may therefore be some amendments before the legislation is finally introduced but if you may need to assess any contractors you use you will need to start the review process well ahead of the April 2020 deadline.
So what are the key aspects?
- The status determination must be cascaded to all parties in the labour supply chain by the entity providing the determination to both the worker directly and the party they contract with. This will require an explanation as to the reasoning behind the determination where requested. There is some suggestion that there will be a mechanism for resolving status disputes but no outline as to how this would operate.
- Liability for unpaid tax rests initially with the party who has failed to fulfil its obligations but in a long supply chain this liability can potentially pass up and down the supply chain which is designed to make all parties in the chain compliant.
- If the “employer” determines that the worker would be deemed an employee, the employer must deduct PAYE from any payments it makes to the personal service company. The deduction should include apprenticeship levy but not student loans.
- These new rules will take precedence over other tests such as those for Managed Service Companies or within the Construction Industry Scheme.
So how do I determine employment status?
The determination as to whether someone is employed or self-employed has been a long-standing and difficult debate. HMRC has issued guidance on the factors they consider relevant in determining the position through their Employment Status Manual, factsheet ES/FS1 (Employed or self-employed for tax and National Insurance contributions) and offer an Employment Indicator Tool.
The tests are based around determining the level of control, the rights and obligations of both parties, whether there is mutuality of obligation and the intention of the parties. Other factors such as the length of engagement and financial risk of the parties may also be relevant. What is most relevant may change from contract to contract and the tests should be applied to the actual operation of the contract rather than simply the contractual terms. If you use the Employment Indicator Tool then HMRC have said they will stand by the results of that test providing the answers to the questions have been given accurately so if you are using this tool do print and save the results.
Why do I need to know this?
All bar the smallest organisations will need to apply these tests and if you have a number of contractors it is likely to take time to confirm and communicate your determination of status.
If you fall within the definition below you can however heave a sigh of relief (at least for now) as these rules will not apply to you.
To be a small organisation which does not need to apply these tests you need to meet at least 2 of the 3 criteria below:
- Annual turnover less than £10.2m
- Balance Sheet total less than £5.1m
- Less than 50 employees