01 October 2019 by Russell Cockburn
The Off-Payroll Working rules for April 2020
In late August 2019 HMRC issued several press releases providing a timely reminder to businesses in the private sector that they need to review the way they are paying freelancers and subcontractors. All qualifying businesses will have to apply the so-called 'IR35' rules as from April 2020 if they meet the qualifying definitions under the Companies Act; broadly that they are either medium or large as defined under the relevant Companies Act tests. If a business is above the relevant thresholds, (it has to meet (fail?) two of the three threshold tests), then it will have to apply these rules from the April 2020 date.
This is going to mean a big change for some businesses in the way they make payments to Personal Service Companies, (PSCs) used by their freelancers and in general terms, it will mean that they will be operating PAYE against all payments they make in future to such PSCs from that time onwards, unless they are satisfied that the terms of the engagement with the PSC for the provision of particular services by an individual fall outside the IR35 rules, broadly that if the individual was not using a PSC then the terms of their engagement with their end-user are such that they would indeed be genuinely self-employed for income tax and NIC purposes. As anyone who has had to review such cases in the past knows this is by no means an easy determination to make.
Because this is not an easy test to check, many businesses now face having to review all their engagements with freelancers and subcontractors operating via PSCs before the April 2020 deadline. These rules have applied in the Public Sector since April 2020 and the experience there was that many large organisations either did not have the time or resource in-house to carry out these multiple reviews where they were using such subcontractors, or they took the pragmatic view that they did not have the expertise to make these types of decisions correctly. Businesses in the private sector now face the same prospect. Do they devote the time and money to doing these reviews before April 2020 or do they adopt a more 'defensive' approach vis-a-vis HMRC and simply transfer their subcontractors over to the new regime en-bloc and potentially face significant industrial relations problems with the freelancers they use?
At its most basic, deciding that a PSC ought to be operating the IR35 rules and then deducting and accounting to HMRC for Employees’ and Employer’s NIC’s as well as PAYE income tax when payments are made to the PSC after April 2020 will represent a very significant cost to the 'end-user', i.e. 13.8% NICs for payments above the lower threshold and also of course potentially higher income tax and NIC liabilities for the PSC user themselves.
Some businesses will meet significant resistance to this 'reclassification' of their status for tax purposes from their subcontractors, especially those who are providing unique and very specialist services or who are perhaps in short supply. These individuals are likely to demand increased fees to compensate for their financial losses or, as some commentators have already suggested, may simply take their specialist skills and services elsewhere, perhaps even overseas. Others whose skills are more ubiquitous may well have to face up to reduce earning after next April. In the north west where I live the nuclear industry uses a significant number of such individuals and trains many apprentices, (to its great credit and the benefit of the local community it has to be said), and it seems likely to me that such individuals will not find it easy to negotiate higher fee rates after April 2020 given the state of the UK economy at the moment and the fact that they are not exactly hard to find. Perhaps some more enlightened end-uses will offer the 'share the pain' with their PSC uses or is that being too naive?
A business that carries out such reviews must issue 'status determinations' to such PSC users prior to taking them on under new engagements and will also have to review existing engagements with the PSCs that it is currently paying. The PSC user may dispute such determinations and ultimately such disputes could end up before Tax Tribunals, so the staff making such determinations will need to be confident that they know what they are doing and that the systems and procedures that they put in place over the medium term do in fact produce reliable and accurate results under the IR35 rules. HMRC does of course offer it’s now well-known, (if not well liked by some), CEST tool online to assist end-users and PSC users themselves in carrying out such reviews. This tool has been severely criticised by some commentators as insufficiently comprehensive and it is understood that HMRC is currently working on a revised and improved version as I write. It is to be hoped that this new version is made available very soon as time is fast running out for many businesses to get all their freelancers reviewed before the April 2020 deadline.
Businesses can of course choose to develop their own review checklists and tools in-house, (or perhaps to out-source the decision-making and review procedures to specialist advisers) and it seems likely that many will indeed choose to do so. What is of greatest importance here is that a business can be seen to have diligently carried out these reviews prior to April 2020 so that if at some later date HMRC carries out a PAYE inspection or status reviews on a business then that business is able to demonstrate that it has operated the new system properly since its inception.
Fundamentally a business will need to be able to show that it has 'taken all reasonable care', i.e. that it has indeed considered the nature of the problem and reviewed its PSC engagements thoroughly and properly. Then it is arguably much more likely that even where a business makes a mistake and issues an erroneous status determination, i.e. classifies an engagement as one of self-employment wrongly, then it ought at the very least to be able to argue with HRMC that matters should simply be rectified for the future rather than having to face up to paying back tax and NIC’s as well as interest and penalties on the basis that it had not taken reasonable care, i.e. not carried out proper reviews.
The recent run of high profile Tax Tribunal cases under IR35 in the media indicates just how seriously HMRC now takes incorrect operation of the IR35 rules where large earnings are involved. It seems likely that this increased compliance attention and close scrutiny can be expected to be applied more widely in future. After all these new rules give the HMRC a potentially very powerful tool to impose increased tax and NIC liabilities and additionally makes it a lot easier for the HMRC to collect these sums as the end-user business is arguably a lot easier and potentially more vulnerable target that individual PSC users.