A number of my clients have been asking me about the off-payroll rules. I have considered the issues set out below from an employment lawyer’s perspective – although clearly there are separate tax implications to be taken into account too.
What are the off-payroll rules? The rules will apply from April 2020 to medium and large companies in the private sector. They will apply to any business which contracts for the supply of services by a worker through the worker’s personal service company (PSC). Wherever the relationship is really one of employment, then the ultimate fee payer will be responsible for deducting tax and ni and accounting for that to HMRC. HMRC has indicated that this will bring around 60,000 businesses in scope for the new rules (as well as 20,000 recruitment agencies). The new rules extend the arrangements introduced in April 2017 within the public sector. The aim is to crack down on those businesses which seek to avoid paying employee income tax and national insurance contributions by supplying their services through a PSC and paying any employees of the PSC dividends instead.
How do I know if the rules are relevant to my business? Only medium and large businesses are in scope. There is an exemption for small businesses (meeting two or more of the following criteria: under 50 employees, annual turnover is no more than £10.2 million, and balance sheet total is no more than £5.1 million.)
The next question is whether, without the PSC in place, the worker is really an employee of the client. This raises questions about the degree of supervision, direction and control that the client has over the worker.
Why is it relevant to determine employment status? There are two main reasons to establish employment status (NB the assessment of employment status for tax and employment law purposes are different but have a number of similarities). The first is that more generous statutory rights apply to employees (for example, the right not to be unfairly dismissed when an employee has over two years’ continuous service). The other is that HMRC could seek to recover any unpaid tax and national insurance (and potentially any interests, costs and penalties too).
What factors are more likely to make the arrangement one of employment?
The following factors (amongst others) will be key:
- Personal service: the obligation to provide services personally (as opposed to the PSC in a genuine consultancy arrangement being able to supply a suitably qualified and experienced substitute);
- Mutuality of obligation (the expectation that the individual will carry out a role and receive a regular salary) – as opposed to an individual who is genuinely self-employed who will typically be engaged to do a particular project or task and will be paid in response to achieving milestones in that project;
- A right of control over the individual in terms of the way in which they do tasks, what they do and the location of the task. A genuine consultant is free to determine when, where and how they work;
- Provision of equipment (a genuine consultant will typically provide their own equipment); and
- Integration within the client’s business and the provision of benefits and paid holiday.
What impact will the new rules have? HMRC has estimated that the increase in income tax and national insurance contributions will be significant. In the 12 months following the introduction of these rules in the public sector, it resulted in an increase in revenue of £550m to HMRC. Some commentators (such as contractorcalculator.co.uk) suggest that take home pay for workers contracting through PSCs will reduce by 43%, prompting workers to increase their rates. The same website raises interesting questions about the behavioural impact on both clients and workers when the new rules are introduced. It may, for example, prompt businesses to scrutinise their workforce more closely and downsize in some cases to offset the increased costs of the new arrangements.
What practical steps should businesses take now?
- It is good practice (whether or not your business is a medium or large company) to conduct an audit to understand the number of individuals contracting through PSCs and the nature of those arrangements to assess whether they are really employment relationships.
- Review the contracts currently in place to document the arrangements. Do they reflect the arrangements in practice? Do they contain appropriate clauses to protect the business? HMRC has previously indicated, for example, that a clause enabling the PSC to appoint a substitute to provide the work (provided there is no wide veto on any substitute by the client) will be a strong indicator that the arrangement is not one of employment.
- Seek specialist advice to assess the level of risk within the business and to draw up appropriate contracts to protect the business.
Jane Wheeler is an employment lawyer at Keystone Law. https://www.linkedin.com/in/jane-wheeler-a491652/