From 6 April 2021 the scope of the off-payroll working rules (IR35) have been expanded to cover medium and large private sector organisations, employment agencies and third parties within the labour supply chain.
What has changed?
Many contractors or self-employed individuals operate through their own limited company called a “personal service company” or PSC. As a general rule, self-employed individuals tend to pay less income tax and social security contributions in the UK than employees. Previously, the responsibility for deducting the correct taxes and social security contributions rested primarily with the PSC, as did the liability for not paying the correct taxes.
From this month, an individual’s tax status is determined by the end user client to whom a contractor provides their services, not the contractor. If the client decides that the engagement falls within the scope of IR35, payment to the contractor’s company is taxed at source – as if they were an employee.
If the relationship genuinely falls outside the IR35 rules, then both workers and their hirers can take advantage of the tax efficiency of working through a limited company. Clients don’t have to pay employers’ NIC or provide employee benefits to contractors. The individuals themselves benefit from tax efficiency.
Who do the new rules apply to?
The rules apply to all private sector companies that meet two or more of the following conditions:
- an annual turnover of more than £10.2 million
- a balance sheet total of more than £5.1 million
- have more than 50 employees.
This means that there is a small company exemption for organisations which do not meet two or more of the conditions. There are also rules which cover connected and associated companies. If the parent of a group is medium or large, their subsidiaries will also have to apply the off-payroll working rules.
If the end user client is wholly overseas, the off-payroll working rules do not apply. The worker’s intermediary (usually a limited company) will be responsible for determining if the rules apply. An organisation is classed as overseas if it does not have a UK connection ie is not resident in the UK or does not have a permanent establishment in the UK.
End user client determines employment status using a Status Determination Statement (SDS)
Clients need to decide the employment status of everyone they engage through their intermediary or through an agency. They must take reasonable care when making a determination, provide reasons for the conclusions and communicate the determination using an SDS to the individual or organisation the client contracts with. This process should have been carried out before 6 April, but there is still time to do it this month. Clients can use the Government’s CEST tool (Check employment status for tax) to check whether individuals on a specific engagement, should be classed as employed or self-employed for tax purposes.
Preparation for the changes
Businesses should consider:
- Identifying workforce individuals (including those engaged through agencies and other intermediaries) who are supplying their services through PSCs and reviewing labour supply chains. Are contractors engaged directly or via umbrella companies or PSCs?
- Introducing processes to analyse whether, when future engagements are made, in each case how payments will be made to contractors within the off-payroll rules
- Ensuring that processes are in place to keep detailed records of the employment status determinations, including the reasons for the determination and fees paid and how to deal with any disagreements that arise from the determination.
In February 2021 HMRC published a briefing supporting organisations to comply with changes to the off-payroll working rules confirming that businesses will not have to pay penalties for inaccuracies in the first 12 months relating to the rules, regardless of when the inaccuracies are identified, unless there is evidence of deliberate non-compliance.
HMRC has also committed not to use information acquired as a result of the changes to the off-payroll working rules to open a new compliance enquiry into returns for tax years before 2021 to 2022, unless there is reason to suspect fraud or criminal behaviour.
In an exclusive report in the Guardian this weekend it was indicated that the government may be planning to introduce a tax increase for the over-40s across the United Kingdom, in order to provide a fund to pay for the care of those who require residential or nursing care towards the end of their lives. Apparently, the government have been looking at similar schemes which apply in Germany and Japan whereby citizens are charged a levy of 1.5% of their salary which is paid into a central pot to fund future care. An alternative could be some form of compulsory insurance for the over-40s.
There can be no doubt that the issue of funding social care in the UK is becoming more and more of a political and economic time bomb, particularly given our ageing population and the rising cost of care itself. At present, in Northern Ireland, if an individual requires residential or nursing care and has capital assets in excess of £23,250 then they will be responsible for the full cost of that care, with the result that in many cases people’s life savings and children’s inheritances are largely wiped out. Similar rules apply in the rest of the UK.
However, there is no doubt that this proposal is likely to be politically contentious in itself. The over-40s are all of course potential Conservative voters and such proposals may not play well to them. In addition, a fully insurance-based system would leave those affected at the mercy of insurance companies when it comes to the cost of premiums. Clearly, any proposal to fund social care through the tax system would either have to be done on a UK-wide basis or result in further divergence of tax rules throughout the UK.
It is important to remember that these are currently only proposals and we have yet to see any detailed draft legislation.
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