Businesses which engage self-employed contractors need to prepare for major changes coming into effect next spring – and now is the perfect time to get up to speed, as the Government has just released further details of the legislation.
Rules about off-payroll working which have applied in the public sector since 2017 will apply to many private sector businesses from April 2020.
Currently, under tax legislation known as IR35, if a self-employed contractor provides their services to an end-user through their own limited company, it is the responsibility of that company (rather than the end-user) to determine whether the contractor is a 'deemed employee' for tax purposes and to account to HMRC for the income tax and national insurance contributions. This has obvious advantages for end-users in terms of convenience and minimising their own tax risks. In 2017, it became the responsibility of public sector end-users to assess whether the 'deemed employment' provisions applied to such contractors and to account to HMRC for the relevant income tax and NI.
Now, from April 2020, these rules are being extended to the private sector. They will apply to all businesses, with exceptions for small companies (i.e. those which benefit from the small companies accounting regime) and an equivalent exception for businesses which are not companies but which meet the turnover limit for small companies.
These end-users will need to:
- determine whether the deemed employment rules apply in relation to each individual contractor providing services through an intermediary business;
- issue each contractor with a written statement setting out the determination of their status and the reasons for it;
- deduct income tax and NI contributions at source through PAYE; and
- include the individual in their payroll for the purposes of determining whether they need to pay the apprenticeship levy and how much they need to pay.
End-users will also need to set up an internal process by which the contractor can challenge the end-user's determination of their status.
Although there is no obligation to use HMRC's online status tool (CEST) (and the tool sometimes gives questionable results), it has the advantage that HMRC is bound by the determination given online as long as the information entered was correct.
Preparing for these changes is a significant project, which will include:
- an audit of the business' current use of contractors and an assessment as to which may be caught by these rules;
- assessing whether the terms on which the business currently engages those contractors permit deduction of tax and NI via PAYE and will otherwise be fit for purpose in the new regime; and
- if not, planning when to terminate those contracts (bearing in mind any notice provisions) and creating updated contracts to be entered into with effect from 6 April 2020.End users may wish to renegotiate fee rates to reflect the increased cost and administrative burden.
- ensuring that the business has the correct details from contractors (e.g. their National Insurance number) to be able to operate PAYE for them.
All of this will take time, so affected businesses should start getting ready now.
It's important to bear in mind that an audit of the current workforce may potentially be a disclosable document in any dispute (whether with HMRC or the individual concerned) over their status. Any businesses carrying out such an audit may wish to do so in consultation with legal advisers to ensure that legal privilege applies to the audit.