Legal briefing | Tax, Employment, Incentives & Remuneration |

Delay to the Off-Payroll reforms – What does it mean for your business?

Overview

On 17 March, the Government announced that the changes to the Off-Payroll rules (the 'New Rules'), due to come in on 6 April 2020, would be delayed by one year as part of a package of measures to ease pressure on businesses in light of the coronavirus outbreak.  In these challenging times, the news was welcomed by clients and contractors concerned about the financial impact the changes would have on them.

The Government has, however, made it clear that this is a delay and not a cancellation of the New Rules which will now come into effect on 6 April 2021. Many companies have already planned or made changes to the way they engage contractors and will be wondering what to do.  These are some of questions we think such organisations may have.

Questions

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We have already issued Status Determination Statements (SDS) to our workers operating through personal service companies in anticipation of the New Rules coming in on 6 April this year. What should we do now?

The answer to this depends on whether or not you considered the worker to be a deemed employee for tax purposes.


  • If the SDS states that they would be regarded as self-employed for tax purposes

Here, the position is straightforward – you can make payments to the PSC gross which is what you would have done had the New Rules come in.  For the 2020/21 tax year you have the additional comfort of knowing it will be the worker's intermediary that is responsible for the tax and National Insurance contributions (NICs) due if HMRC disagree with your analysis.


  • If the SDS states that they would be regarded as a deemed employee for tax purposes

This is a more complicated situation.  It is important to remember that the New Rules (when they come in) essentially only change the way tax and NICs arising under the existing Off-Payroll rules is collected.  They do not change the test used to work out whether a worker should be deemed to be an employee for Off-Payroll tax purposes.  Under the existing rules, the PSC has the responsibility of applying this test.  If the PSC concludes that the individual should be considered a deemed employee for Off-Payroll purposes, the PSC will have to account for tax and NICs under PAYE.

If the existing Off-Payroll rules apply with the result that the PSC has to account for tax and NICs, as the client, we don't have anything to worry about, do we?

It is true that the liability to account for PAYE income tax and NICs under the existing Off-Payroll rules rests with the PSC and is not transferred to the client company (or fee payer).  However, one of the reasons the Government devised the New Rules is because it believed many PSCs were failing to pay the tax and NICs that it considered were due.  As a client, you need to be aware that you could face criminal liabilities if you fail to take reasonable steps to prevent tax evasion in your worker supply chain.  We strongly recommend that you write to those workers and PSCs within the scope of the Off-Payroll rules reminding them of their obligations.  We realise that this could be a sensitive issue but you could express it in terms that, due to the delay in introducing the New Rules, you will make payments to them without deducting tax and NICs in the expectation that they or their PSC will carry out their own analysis under the Off-Payroll regime and account for tax and NICs as appropriate.

We have a number of workers where we agreed to pay them an increased fee to take account of the tax and NICs that we would be deducting from payments made to them under the New Rules – can we unwind these agreements now?

This will depend on the relevant contract and you would need to take advice on its particular terms.  As a general point, if the increased fee was conditional on the New Rules coming into effect then it should be possible to carry on paying the original fee.  However, if the contract provided for an increased fee automatically from 6 April 2020, it is likely that you will need the agreement of the PSC to change it.  If you are able to revert to the original fee, then if the fee was increased because you considered the arrangement to be within the Off-Payroll rules it is important that you remind the PSC to do its own analysis and account for tax and NICs as appropriate (see the answer to Question 2 above).  You should also note that, under the existing rules, employers' NICs are payable by the PSC rather than the client and you need to check whether the contract states who bears the cost of this.

We reduced the fees payable to our contractors to take account of the fact that we would have to pay the additional costs in relation to their deemed employment. As we no longer have to meet any additional costs, can we change the terms of the agreement to revert back to the original higher fee?

This is a commercial decision that you will need to agree between you and the relevant PSC.  If you think the arrangement will continue beyond 6 April 2021, you will need to bear in mind that you as the client will be liable for any costs (such as employers' NICs and apprenticeship levy) from that date.  You therefore need to ensure that the contract provides for the fee to be renegotiated to take account of any increase costs you incur.

We have already moved several our workers to employment contracts – can we reverse this?

As you will know, being treated as a deemed employee for tax purposes and being an actual employee for employment law purposes are two quite different things.  If the individuals concerned are prepared to move back to working as contractors through their PSCs, it is important that you remind them of their obligations under the existing rules (see the answer to Question 2 above).  It will be hard (although not impossible) for them to argue that the Off-Payroll rules do not apply to their engagement when they were previously doing the same job on the same terms as an actual employee.  Also, it is worth bearing in mind that the Government is adamant that this is a delay and the New Rules will definitely come in from 6 April 2021.

If you were preparing to engage workers as employees but hadn't done so, similar issues arise.  Depending on how far down the process you had gone, you may need to take advice on the implications of withdrawing offers of employment.

We've put in place procedures for issuing SDS, established a disagreement process and set up new payroll systems. Do we just put these on hold until April 2021?

To a certain extent, yes.  This exercise won't be wasted as we have every reason to believe that the changes will come into effect on 6 April 2021 in much the same form as the Government has already announced.  There might be some minor procedural changes (perhaps to the disagreement process and the tax recovery provisions) but we won't know what these are until the relevant legislation is published at a future date.  In any event, we do not expect any modifications to be significant.

Clients are now largely in a similar position to a year ago – if you take on workers before 6 April 2021 and you think the contract will extend beyond that date, you should consider whether the arrangements will be within the New Rules and draft the contract accordingly (i.e. providing for appropriate indemnities, including the ability to deduct income tax and NICs, enabling the fee to be lowered).  This could be a good opportunity to test your status determination processes so that they are in the best shape possible by the time you are required to use them.  It will be a good idea to carry out a status determination for all new engagements that will extend beyond 6 April 2021 as this will flush out any potential disputes about the application of the New Rules. 

As we get closer to 6 April 2021, you should consider putting in place a timetable for refreshing all status determinations to ensure that they are correct when the New Rules come into force.

We are an overseas client with no UK presence – is it still the case that the New Rules won't apply to us next year?

Before delaying the introduction of the New Rules, the Government announced that a change would be made that would exempt overseas clients from having to apply them.  Although the draft legislation making this change hadn't been published, the Government did issue guidance stating that a client would be 'overseas' if it was neither UK resident nor had a permanent establishment here.  In such circumstances, the existing rules would apply and the PSC would have to account for tax and NICs.

When the New Rules were about to come in, the Government said that it would take a 'light touch' approach to penalties for errors in the first year of operation and would not use information resulting from the changes to open new investigations into PSCs for tax years prior to 6 April 2020. Will this approach now be moved forward a year?

At the moment we don't know – the Government could take the view that businesses have had an additional year to prepare and therefore won't take such a lenient view on penalties in the 2021/2022 tax year.  We also can't be certain that its pledge to not look into earlier years will apply to the 2020/21 tax year.

Can we use the Coronavirus Job Retention Scheme to furlough workers providing their services through a PSC?

The Coronavirus Job Retention Scheme (CJRS) is one of the measures announced by the Government to help those affected by the Covid-19 pandemic and provides a wage subsidy for employers who place employees on 'furlough' (i.e. stands them down without work instead of making them redundant).  Such employers will be able to claim a reimbursement of 80% of the employees' wages up to a maximum of £2,500 per employee per month. Workers providing their services through a PSC are not your employees and are not paid through your PAYE system so you cannot furlough them under the Coronavirus Job Retention Scheme.  It is important that you resist any claims by such workers that they are, in fact, direct employees (to be eligible for furlough) as this exposes you to challenges by HMRC that they have always been your employees and as a result you owe arrears of tax that should have been deducted under PAYE.  You could also be open to claims such as unfair dismissal and statutory redundancy pay in the event that the contract is later terminated.

Can a worker operating through a PSC be furloughed by the PSC?

Possibly, although this is a matter for the PSC to determine.  If the PSC considers the worker's arrangement with you to be outside the existing Off-Payroll rules it is likely that it will only be able to claim a small amount under the CJRS.  This is because individuals working through a PSC usually receive most of their income through dividend payments rather than a salary or a director's fee.  If the PSC operates PAYE within IR35 then it might be able to claim a reimbursement under the CJRS.

Can workers operating through a PSC take up the scheme to help the self-employed?

No, and this seems to be a deliberate policy decision.  The 'Self-employment Income Support Scheme' (SEISS) offers self-employed individuals and members of partnerships that were trading in the last tax year, and have been adversely affected by the pandemic, a taxable grant worth 80% of their average monthly profits (calculated over the last three years) subject to a monthly cap of £2,500.  However, the scheme is specifically not available to those paying themselves a salary and dividends through their own company.  If they aren't able to take advantage of the CJRS, on the face of it, workers operating through a PSC have less government support open to them than those contracting with clients direct.  They may, however, be able to take up one of the government schemes for increasing access to loan finance.  Workers that supply their services in a mixture of ways (through their PSC and by engaging with clients direct) might be able to claim some support and should seek advice.

When announcing the SEISS, the Chancellor gave a warning that in devising the scheme it was "now much harder to justify the inconsistent contributions between people of different employment statuses.  If we all want to benefit equally from state support, we must all pay in equally in the future."  It isn't clear what the Chancellor meant by this – he could be alluding to the different rates of National Insurance contributions paid by employees and the self-employed and hinting that they might be aligned in the future or he might be pointing to a more fundamental overhaul of how the employed and self-employed are taxed.  Alternatively, the Chancellor might simply be reinforcing the government's commitment to the Off-Payroll reforms next year.

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