Changes to UK off-payroll working rules to proceed from April

Out-Law News | 27 Feb 2020 | 12:40 pm | 3 min. read

Changes to the IR35 off-payroll working rules will go ahead from 6 April 2020 as planned following a review, the UK Treasury has confirmed.

However, taxpayers will not have to pay penalties for any errors in the first year of the new regime, other than in cases of deliberate non-compliance. The government's response also confirms two previously-announced commitments: that the new rules will only apply to services carried out after 6 April 2020; and that information resulting from changes to the rules will not be used to open new investigations into personal service companies (PSCs) for tax years prior to 2020-21 unless there is reason to suspect fraud or criminal behaviour.

Tax expert Penny Simmons of Pinsent Masons, the law firm behind Out-Law, said: "The government's decision to go ahead with the reforms to IR35 from 6 April is unsurprising – a delay was never really on the table. However, businesses and contractors alike will welcome many of the comments in today's response document".

Simmons Penny

Penny Simmons

Legal Director

Businesses need to make sure that they have processes in place to deal with status determinations appropriately, otherwise they risk not having taken reasonable care - which may lead to increased tax risks and penalties.

"Businesses will welcome HMRC's 'light touch' approach to penalties, where businesses will not have to pay penalties for inaccuracies in the first 12 months unless there was deliberate non-compliance. Contractors have been worried about how receiving a determination that they are inside the IR35 rules could impact their tax position for earlier years, where they have paid tax on the basis that they were outside the rules. They should certainly take comfort from HMRC's repeated confirmation that they will not open enquiries into earlier tax years unless there is reason to suspect fraud or criminal behaviour. Hopefully, this further confirmation will also help businesses that are facing disputes with contractors purely on the basis that contractors want to protect their previous tax position," she said.

"Businesses should also take note that HMRC has again confirmed that businesses cannot take a blanket approach when making status determinations and must make determinations on a case-by-case basis. Businesses need to be alive to this issue and make sure that they have processes in place to deal with status determinations appropriately, otherwise they risk not having taken reasonable care - which may lead to increased tax risks and penalties," she said.

The IR35 rules require that employment taxes be paid by people who provide services through a PSC if that person would otherwise have been regarded as an employee of the engaging business. Currently, where a private sector business engages a contractor through a PSC, liability to decide whether IR35 applies and to pay any employment taxes rests with the PSC.

The rules are due to change from 6 April 2020. From this date, engaging businesses will be made liable for determining whether the IR35 rules apply, in line with the requirements already in force in the public sector. They will also be required to operate PAYE and pay employers' National Insurance contributions (NICs). The changes will not apply to small businesses which engage contractors through PSCs.

The government committed to carrying out a review of the implementation of the changes ahead of the December general election in response to concerns raised by affected businesses and individuals. It held a number of 'roundtable' sessions as part of that review process, from which its previous announcement that the rules would only apply to services carried out from 6 April onwards emerged. Businesses had been concerned that the change would catch services carried out before this date, but invoiced for after the new rules came into force.

HMRC's approach to compliance will be based on ensuring that customers trying to comply with the new rules are not disadvantaged by those that are not, with a focus on deliberate non-compliance and suspected criminal behaviour, according to the report. It is already operating a dedicated project team to educate and support taxpayers when applying the new rules, and will work with taxpayers to correct accidental errors that arise during the first 12 months. Customers will not have to pay penalties for inaccuracies during this period other than in cases of deliberate non-compliance.

Legislation will be introduced as part of the 2020 Finance Bill which will place clients under a legal obligation to respond to a request for information about their size from an agency or worker, so that workers and agencies know whether they can expect to receive a status determination statement. The legislation will also be updated to exclude wholly overseas organisations with no UK presence from having to consider the off-payroll working rules, in response to concerns raised during the review.

The government has also confirmed that contracting organisations will not be permitted to take a 'blanket' approach to categorising all engagements as employment, regardless of the facts in each individual case. Determinations must be carried out on a case by case basis. Contractor representatives reported concerns during the review process that some of their clients were not carrying out individual assessments.

HMRC has today published further updates to its employment status manual to reflect the changes introduced by the review, and will be publishing further guidance to support contractors in understanding the changes. It intends to commission external research into the impact of the new rules, including on how status determinations are being made, six months after implementation.