Off-Payroll: Implementation Draws Nigh
The intermediaries rules – often referred to as the off-payroll rules and IR35 – are now due to come into force on 1 April, bringing the private sector into line with the public sector. They were originally due to come into force on 6 April last year but, like a myriad of plans for 2020, were shunted at the last moment by more pressing and urgent matters as the pandemic took hold.
The delay was intended to help businesses and individuals deal with the economic impact of covid-19. Off-payroll rules have applied to the public sector since April 2017, but the new requirements will encompass all public sector clients.
If the new implementation date remains as planned, private businesses will be required to determine for themselves the correct tax status of contractors working through personal service companies (PSC) and ensure they are appropriately taxed.
They will also have to determine whether the IR35 rules apply; and if so implement and operate PAYE and employers’ NI contributions. Companies will be required to state their decision via a
Status Determination Statement before the contract begins. This is a formal statement which declares a contractor’s deemed employment status following an IR35 assessment, along with reasons for reaching that conclusion.
Will the rules apply to all businesses?
No, small businesses engaging contracts through PSCs will be exempt from the new rules, so the onus will remain with the PSC to determine tax status and implement the IR35 rules in relation to individuals.
A ‘small’ business for these purposes is one which satisfies at least two of the following conditions:
· Having a maximum annual turnover of £10.2m
· Having a maximum balance sheet total of £5.1m (ie the total amount shown as assets in the
company’s balance sheet before any liabilities are deducted)
· 50 of fewer employees
The small business exemption does not, however, apply to public sector organisations.
Also, if the end-client is based wholly overseas with no UK presence, the new rules will not apply.
On a related point, the rules will only apply to those services which are carried out from the date the new rules are implemented
What does this mean in practice?
Businesses within scope of the new rules need to understand the legal and tax implications of the new rules and take specialist legal advice if they engage any individual via a PSC (even if through an agency). This is particularly important if it’s the exception rather than the norm. No business will welcome an HMRC investigation.
They should keep details records of their people’s employment status as determined under the new rules and adjust their accounting procedures to enable income tax and NI contributions to be dealt with appropriate.
They should also become familiar with the practical guidance published by government last spring and recently updated https://www.gov.uk/guidance/prepare-for-changes-to-the-off-payroll-working-rules-ir35
Penalties for non-compliance
Some of the details are a little vague, but it is understood that businesses may avoid penalties for errors in the first year unless non-compliance is deliberate.
Last February, HMRC issues a statement explaining that it would take a ‘light touch’ approach to penalties. It has also confirmed that customers will not have to pay penalties for inaccuracies in the first 12 months (regardless of when the inaccuracies are identified) unless there’s evidence of deliberate non-compliance.
In a further word of reassurance to businesses, HMRC said it will not 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.
It suggested a supportive rather than aggressive approach to business, but said it “will challenge deliberately non-compliant customers” – including work-around tax avoidance schemes.
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