Liz Bridge, Secretary to the Construction Industry Joint Taxation Committee, explains the reforms to the off-payroll working rules – commonly known as IR35
Over the years many people in construction have been encouraged to form their own limited companies and to contract for other firms via that limited company.
The incentive was to avoid PAYE and more particularly employers and employees NIC. HMRC tried to control the loss of tax and NIC with rules known as IR35 but have now concluded that the IR35 legislation failed. They estimate that only 10% of people who should be paying tax under the current off-payroll working rules (IR 35) are doing so correctly and that currently, an individual with an income of £50,000 who works through their own company, but doesn’t follow the rules, will contribute about £6,000 less than somebody doing a very similar job as an employee.
That is why new rules have been introduced.
The rules apply to medium and large companies (More than 50 employees, more than £10.2 million turnover, more than £5.1m on balance sheet.)
Before 1 April 2020, those businesses must test everyone who is working on their sites and in their offices, who is not already in PAYE. They must decide whether the nature of the work they do and the way it is supervised would mean that if they worked directly for the company, PAYE would be appropriate. Employers can do the test using an online tool designed by HMRC called CEST.
If CEST shows that PAYE would be appropriate, the employer must tell the firm supplying the worker that PAYE should be applied to the income.
If the firm told is an intermediary, they must pass the message on.
What gives this legislation its bite is that if PAYE is not deducted from the workers earnings at some part of the chain , the liability to pay any arrears falls on the first company –the company where the person works and the one that did the CEST test.
In most firms there will not be a lot of tests to be done. The list of working people will exclude everyone in PAYE. Then the firms providing subcontractors like cleaners and admin assistants will be approached, who will generally confirm that PAYE is applied.
The important areas to address are the men working for you through their own limited companies who do not provide substantial materials or other labour. Then there are the agencies who supply workers again who themselves provide no substantial equipment, material or other workers. It is essential that these businesses are told that the worker has failed the CEST test and should have PAYE applied to any payments made –and that the supplier of labour should confirm to you that this is being done. You do not want liability to PAYE building up outside your control. Your firm will be responsible for any unpaid PAYE unless you can show you took sensible measures to ensure the law was complied with.
If you own and work through a personal services company this is very bad news if your client(s) are medium or small businesses. They will be keen to ensure that PAYE is applied in full and may simply want to move a contract back into employment. That is what was seen to happen when this legislation was introduced to impact Government departments and public authorities.
HMRC have issued a new briefing called ‘Reform of off-payroll working rules’ about the extension of the new off payroll rules to the private sector from April 2020. These new off payroll working rules only apply where (if you had worked directly for the end client) you would be deemed to be its employee using the online employment status tests. (CEST)
From 6 April 2020, private sector engagements through personal service companies (PSCs) will be taxed in two different ways:
If the end client is medium or large sized and that client decides (using the CEST tests) that the off payroll working rules apply, the PSC owner will be paid the PSC's fee by its payer (usually an agency) after deduction of PAYE/NICs.
If the end client is small the PSC self-assesses the terms of the engagement under the normal IR35 rules and if IR35 applies, the PSC calculates the deemed payment and applies PAYE/NICs via its own payroll. (these are the rules HMRC think have never worked properly)
In this latest briefing:
HMRC are advising that they will only use information resulting from the changes to open a new enquiry into earlier years if there is reason to suspect fraud or criminal behaviour.
HMRC will launch an enhanced version of the Check Employment status tool (CEST) before the end of 2019 and hope to make the tool clearer, reduce user error and enable it to consider more detailed information. Notwithstanding the planned changes HMRC says that it stands by the results given by the tool now, provided the information entered is accurate.