Following on from the introduction of the Off-payroll Rules for the public sector in 2017, the government announced in the Autumn 2018 budget that it was extending these rules to the private sector with effect from April 2020.
The effect of the rules is to ask: but for the existence of the personal services company (PSC), would the provision of the services by the worker, constitute a contract of services and therefore be one of employment? The consequence is that medium and large companies which contract with PSCs under these circumstances are obliged account for income tax and national insurance contributions through PAYE.
To facilitate the roll-out of the rules to the private sector and, in an effort to learn lessons from the implementation of the rules in the public sector, the government launched a consultation on 5 March 2019 to do three things: assess the suitability of rolling out the off-payroll rules to the private sector; review the public sector roll-out and provide guidance to the private sector on how to prepare for the new rules. The consultation closes on 28 May 2019 with draft legislation due to be published in the summer of 2019.
The first point to note is the time period between the introduction of draft legislation and the implementation thereof in April 2020. The private sector will have very little time to assimilate the impact of the rules and understand the duties and obligations created before the date of implementation. Clearly HMRC hopes that by using the public sector rules as a template, the private sector can start to assimilate those rules early and then only have to make adjustments for any variations that HMRC makes to the rules following this latest consultation. The difficulty is that if a medium or large company is currently negotiating an engagement with a PSC or an agency that contracts with a PSC, and that engagement is longer than twelve months, these rules will affect that engagement. Businesses impacted by these rules need to understand them now.
As part of the consultation, the government has published guidance on what actions businesses should be taking now to prepare for the off-payroll rules. These actions include:
- Identify and review current engagements with intermediaries, including PSCs and agencies that supply labour to them;
- Review current arrangements for the use of contingent labour, particularly within the organisation functions that are more likely to engage off-payroll workers;
- Put in place comprehensive, joined-up processes (assess roles from a procurement, HR, tax and line management perspective) to get consistent decisions about the employment status of the people they engage;
- Review internal systems, such as payroll software, process maps, HR and on- boarding policies to see if they need to make any changes.
None of what is set out above is simple and easy to achieve. In large organisations, this sort of business change engages a significant number of individuals and requires time and planning.
What are the key changes to the off-payroll rules that the government is considering?
- Currently there is no obligation on the client in receipt of the services to inform the worker directly of its decision to deduct income tax and NICs. HMRC is recommending two adjustments to this rule: firstly that the worker be entitled to be informed directly; and secondly, the supply chain be obliged to cascade information down the supply chain to the fee payer (if this is not the ultimate client). HMRC recognises that in the private sector, supply chains can be long and complicated and this part of the consultation is aimed at determining how the fee payer is identified in the supply chain and whether there is scope for a simplified method of sharing information;
- Addressing non-compliance. Where a party in the supply chain fails to fulfill its obligations, the liability to deduct and pay over income tax and NICs will remain with that party which is in default until such time as it does comply with its obligations. If HMRC cannot collect the tax due from the party in default, the liability will move back up the supply chain to the party first in the line;
- Workers and fee payers should be entitled to ask for reasons for a determination made by the client and the client should have in place a process to allow for challenge;
- Possible legislative options to allow fee payers to make pension contributions free of income tax and NICs to the worker’s personal pension.
The organisational resources required to assimilate these rules and implement them are significant. Businesses would do well to activate these changes as soon as possible.