With 2019 nearly upon us, Brexit remains the priority item on most business' agendas. But other changes will require attention too, with tax and employment status being particularly hot topics for the year ahead.
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Jane Amphlett, Partner
Businesses which engage consultants directly must assess the tax status of the consultant, i.e. whether they are an employee (in which case the business must operate PAYE and deduct tax and NI), or self-employed (and so responsible for their own tax and NI).
Currently, where a business contracts with a personal services company (PSC) rather than the individual providing services, HMRC's IR35 rules mean that if the individual would have been an employee if the contract had been with the individual personally, the PSC must account for tax in a way that mirrors PAYE. At present, this does not affect the business engaging the individual. Therefore, for many years, employers could rely on engaging consultants through PSCs without worrying about the tax implications of their employment status.
HMRC considered that this system was being abused and, from 6 April 2017, public sector bodies have had to determine the employment status of their contractors (ignoring any PSC) and apply PAYE and NICs if the contractor should be treated as an employee. The 2018 Budget confirmed that, as expected, the private sector will need to follow suit. From 6 April 2020, medium and large businesses will have to carry out employment status checks on any contractors operating through PSCs and apply PAYE and NICs to any contractor who should be treated as an employee for tax purposes. The good news is that HMRC has decided not to apply the rules to small businesses. No guidance has been given on the meaning of a "small" business; however, it is likely to be along the lines of a business with fewer than 50 employees and turnover of less than £10m.
Over the next year, businesses that engage contractors through PSCs, and contractors who provide their services through PSCs should audit their arrangements and determine how these rules will affect them. Many businesses and contractors will need to reconsider their commercial arrangements to ensure that they reflect the shift in liability for payroll taxes.
Some companies (especially owner managed businesses) remunerate directors and senior employees largely through dividends rather than salary. They often issue different classes of share to each director, called "Alphabet Shares" because they are designated with names such as "A Shares", "B Shares", etc. This enables the company to declare different dividends for each class of share based on the director/employee's performance and contribution.
Where a shareholder sells his/ her shares in a qualifying company that is their "personal company", they qualify for Entrepreneurs' Relief (a lower 10%, capital gains tax rate) if they have held their shares for more than one year. The 2018 Budget included changes to Entrepreneurs' Relief; aextending the qualification period to 2 years and changing the definition of a "personal company". From 29 October 2018, in order for a company to be a shareholder's personal company, their shares must be beneficially entitled to 5% of the profits and 5% of the assets available for distribution. Companies with Alphabet Shares frequently leave the declaration of dividends to the discretion of the directors, which means that no shareholder is entitled to any dividend on their class of share.
This could prejudice the right of all shareholders to claim Entrepreneurs' Relief when they sell their shares. Any company that has more than one class of share should urgently review its articles of association to check the rights of shareholders and may need to change them in order to protect the shareholders' position.
From April 2020 (postponed from April 2019) although the first £30k of any ex gratia termination payment can still be paid free of tax and NI, employer's NI contributions will need to be deducted from the balance as well as income tax (currently only tax is deducted from the balance).
The Government has published proposals to refrom the laws on worker status and the gig economy following Matthew Taylor's review of employment status and the modern workplace. This includes a right for gig economy workers to request a fixed hours contract and enhanced enforcement of holiday pay rights. At the same time, the Supreme Court's decision in the long-running Uber worker status case is expected in the next few months. Further detail will follow...!
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