Preparing for off-payroll changes in 2020
The Chancellor’s Budget announcement that the off-payroll rules would not be rolled out in the private sector until April 2020 was welcome, but it’s not time for complacency as there is plenty to do over the next 16 months. With another consultation planned (no date indicated), if this delivers more change we could be looking at this time next year before we have the definitive rules.
The Budget speech also confirmed that businesses classified as ‘small’ would not have to apply the rules and could carry on paying Personal Service Companies gross based on their invoiced amount, but that carve out also brings complexity:
- Will the current definition that looks at turnover, assets and head count change as it is an EU derived definition?
- What if the business goes over the thresholds during a tax year, is that when the rules kick in, or is it from the next tax year?
- For payroll agents managing acquisitive/expanding clients, care will have to be taken to establish who begins to be caught by the rules and when
Preparation is key
As the NAO report on the BBC’s issues with implementing the rules in April 2017 shows, there is a lot of work to do before the implementation date. Whilst some businesses will not know if they’ll be using contractors/freelancers in April 2020, some will already have contracts with PSCs that extend past the implementation date. Remember the new rules affect payments made after the law changes, it’s not just for new contracts. So, a contractor might have his limited company invoice paid gross in March 2020 and with tax and Ni withheld in April 2020.
For large businesses, even establishing how many off-payroll workers are currently in place might be a challenge. Naturally, finance systems are the place to start, working through all suppliers and considering:
- Is it a contract for services with a limited company, for example window cleaning or photocopier maintenance? or
- A contract for personal service, for example an IT or HR consultant where you want a specific individual to fulfil an ongoing role or deliver a project?
Then home in on the personal service contracts and put these through HMRC’s CEST (Check Employment Status for Tax) tool, once it’s been redesigned for the private sector of course! The results from the CEST tool will be binding on HMRC unless they discover that you answered the questions disingenuously to get the outcome you and the contractor wanted (i.e that they aren’t caught by the rules). The public sector has found that 15% of cases cannot be determined and require a conversation with HMRC, so don’t leave this until the last minute. Equally, an ‘inside IR35’ determination inevitably goes down badly with the contractor and negotiations on fees may need to be factored in ahead of April 2020 when their invoice will see a 32% reduction, thanks to the tax and NI withheld.
To use the CEST tool requires a knowledge of employment status and the case law that has grown up over decades, so ideally someone in the organisation needs to be trained and be seen as the subject matter expert in status, to whom all contracts that are off-payroll must be referred for a decision, before the contract is signed. The other problem is that an initial ‘outside IR35’ ruling may not continue to be appropriate if the way the work is actually carried out changes – for example the contractor is given line managerial responsibilities or moves on to a new role. How will continuing compliance be managed?
As well as negotiating with the affected contractors the businesses also needs to factor into 2020 budgets the employer’s NI and apprenticeship levy on these contractors’ fees – 14.3% in total of course.
Moving to an agency to supply your contractors isn’t a solution either, as the agency has to receive a decision from you as the end user of the contractor as to the nature of the contract and whether IR35 applies.
System changes might have the longest lead time. For example, can you bypass integrated HR systems to set up a ‘deemed worker’ just on your payroll system so tax and NI can be deducted, and the payment reported to HMRC in the Full Payment Submission (FPS)? Many businesses will not want these contractors anywhere in their HR systems, as that risks them inadvertently receiving employment rights such as holidays, sickness and pensions which they are not entitled to. It’s certainly the case that ahead of the first payment under deduction for a contractor, you will need to have established all the data that you need to set up a skeleton payroll record: personal details that may not be on the invoice, such as their NI number and date of birth, as well as treating the amount subject to tax and NI which will only be the daily fees, but not any VAT or expenses.
Don’t bury your head in the sand, the reputational damage that the BBC has experienced is not something any private sector business would welcome.