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 the changes will come into effect on 6 April 2021 in much the same form as the Government had already announced. There have been some procedural changes (to the disagreement process for example) that you need to take into account.
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 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. 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.
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?
In its latest guidance, HMRC has stated that it will take this "light touch" approach towards penalties in the 2021/2022 tax year and will not use information from the changes to look into tax years before 2021/22 unless they have reason to suspect fraud or criminal behaviour.