Broking Business Winter 2019/2020: Beware off-payroll tax changes
Read time: 4 mins
Service: Tax Sector: Financial services
Consultants who provide advice to a business are a feature of all sectors. But for many years governments and HMRC have been concerned that the use of consultants, often off-payroll, is disguising for tax purposes what is truly an employment relationship.
If a business has directly engaged an individual, it has long been understood that where this is an employee relationship (the antiquated ‘Servant and Master’ term is still used in this context), the employer is required to account for PAYE (sometimes retrospectively) for its UK-based people. But in cases where an intermediary is used, such as a personal service company (PSC), that intermediary is currently responsible under the infamous IR35 rules.
Businesses operating in the insurance market, particularly brokers, often use consultants or other service providers hired through intermediary companies, rather than as employees. It is these relationships which are coming under pressure.
IR35 out of favourThe catch is that the Government doesn’t believe IR35 works. It’s already tackled the issue with success in the public sector. From April 2017, it moved the payrolling responsibilities for all employment relationships, whether an intermediary is in place or not, to the host employer.
So it’s no surprise that the off-payroll working rules will now apply in all sectors from April 2020. Where a business falls within the regime from that date, all its relationships that have hallmarks indicating employment will need to be accounted for under PAYE.
Size mattersIt’s important to note that in the private sector not all companies will be caught by the legislation. Small businesses are exempt, and will not need to apply the new off-payroll working rules. A business is small if it meets two of the following three criteria – considered on a global consolidated basis.
- Annual turnover less than £10.2million
- Balance sheet total (gross assets) of less than £5.1million
- Less than 50 employees
I’m in the rules – how should I start?If you are an affected organisation engaging an individual via a PSC, you must decide the worker’s status and communicate it to both the worker and the person contracted with for the engagement, whether an agency or a PSC. HMRC’s check employment status for tax (CEST) online tool is expected to be the primary method used to determine a worker’s status.
This decision on status must be made with reasonable care and any disagreements about it resolved within 45 days of notification from the worker.
What if my consultant is caught?Where the status determination is ‘employee’, an affected business engaging a consultant or any other worker via a PSC will be responsible for accounting to HMRC for PAYE and NIC due on all engagements, And the same applies where the business has failed to determine the status or not dealt with a status disagreement within the 45-day limit.
It’s worth remembering that if you engage a consultant directly, without a PSC in place, these rules have always applied, regardless of the size of your business.
What else should I do now?If you don’t believe you’ll qualify as ‘small’ on the introduction date (currently 6 April 2020), you need to review all current engagements where you have contracted with a PSC. Although the rules will not take effect until April at the earliest, we recommend you confirm these relationships and their tax status as soon as possible, so that all parties can plan for the changes.
From the introduction date, you’ll need to hold supporting documents that confirm the status (employee or self-employed) of all engagements via PSCs. You must also have communicated that status to the worker and other required parties in the labour supply chain. Where the status is ‘employment’, you must account for PAYE and NIC on the payments made to the PSC after the introduction date.
And be aware that working relationships change. If you engage with intermediaries that you conclude aren’t captured on the introduction date, then future changes to your working relationships (for example, an intermediary who provides services one day a week becomes more of a full-time engagement) may mean a change to the tax status.