New rules for off-payroll workers don’t apply immediately but employers should already be considering their implications.
With so much to consider in the here and now, it can be tempting for employers to confine changes not due for well over a year to the back-burner.
But the new rules announced in last month’s Budget that are being introduced for off-payroll workers in April 2020 should not be left sizzling there for too long.
Small firms are exempt but medium-sized and large ones should be turning their attention to the issue soon, because the implications are far reaching – potentially extending well beyond payroll to pensions and other employee benefits.
It is crucial that employers start to understand whether they will be affected, what the likely costs may be and whether their auto-enrolment processes are robust enough.
The impending changes, commonly referred to as “IR35”, involve the extension to the private sector of long-established public sector rules to combat the rising avoidance of the payment of employment taxes.
They require that such taxes should be paid when people provide services to firms through an intermediary – typically a personal service company (PSC) – if that person would have been regarded as an employee of the business had they not contracted in this way.
The provision of services via such a mechanism is effectively being viewed as a tax loophole because the worker is, to all intents and purposes, an employee in disguise.
By structuring affairs via a PSC, the engaging organisation is, in particular, saving significant amounts by not having to deal with Income Tax or to pay employer National Insurance Contributions (NICs) – currently 13.8% – and is avoiding the need to provide employee benefits and other employment rights.
With workers often leaving employers on a Friday and popping up in the same role in the same office the following Monday morning under the guise of being a contractor via a PSC, it was inevitable that HMRC would eventually take a keen interest in the ruse – particularly given the increasing number of younger self-employed workers and the growth in the gig economy.
Up until now it has been the PSC that decided whether they were the employee of their client’s business but, come April 2020, the responsibility will pass to the business engager.
Fortunately, there is no intention to apply these new rules retrospectively. HMRC does not intend to undertake targeted campaigns looking at earlier dates once the individual starts paying taxes under IR35 for the first time. It also has no stated intention of looking at the engaging businesses’ earlier categorisation of workers under IR35.
Going forwards, however, firms using regular services from contractors will need to establish whether these services are exclusive or easily substituted.
If they decide the contractor is effectively an employee in disguise then they will need to start paying them via PAYE and foot the bill for employer’s NICs with effect from April 2020.
They are also likely to have to auto-enrol the contractors concerned in their pension scheme. Indeed, The Pensions Regulator’s current view is that those contracting via PSCs should generally be auto-enrolled.
However, many employers haven’t complied in this respect as they have felt that auto-enrolling someone would effectively be admitting they were an employee – and therefore entitled to other benefits and workplace protections.
We are in no doubt that the new IR35 rules will come into effect when intended and, even though the picture remains a little fuzzy at present, it should become much clearer soon.
A further consultation paper with details of the application of the reforms is expected within the next few months, and draft legislation is anticipated in the third quarter of next year.
There is however, no need to remain inactive until then. Chase de Vere can already help you assess which of the contractors you use might become subject to IR35 and what tests you can employ to determine this.
We can also help you draw up suitable formal policies to put in place and assess your potential NIC, pension and other costs.