Out-Law / Your Daily Need-To-Know

Off-payroll working no enquiry into earlier years unless fraud suspected

Out-Law News | 24 Oct 2019 | 9:34 am | 2 min. read

The UK's HM Revenue & Customs (HMRC) has confirmed that it will not use information from employment status classifications of private sector off-payroll workers to open new enquiries into earlier years, unless there is reason to suspect fraud or criminal behaviour.

The confirmation is contained in a new issue briefing published by the tax authority.

From April 2020, businesses engaging contractors through personal service companies (PSCs) will become responsible for determining the individual's employment tax status and for applying PAYE to payments made to the contractor, if they decide the individual would have been an employee if engaged directly. In these circumstances, engagers will also be liable to pay employer's national insurance contributions (NICs). The changes will not apply to small businesses which engage contractors through PSCs.

Current rules, known as IR35, require that employment taxes and NICs be paid in respect of a person who provides services through a PSC, if that person would have been regarded as an employee of the engaging business if they had engaged directly with the 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.

In 2017 the rules were changed for those working in the public sector. The changes are being introduced in the private sector to ensure that there is consistency across the private and public sector and because HMRC estimates that only 10 per cent of people who should be paying tax in the private sector under the current off-payroll working rules are doing so correctly.

"There have been concerns that if a business decides under the new IR35 rules that a worker would have been an employee if engaged directly, that would open the individual's PSC up to challenges from HMRC in respect of prior years if the PSC had not been applying PAYE. It is welcome that HMRC has now confirmed that they will not normally do this," said Steven Porter, a tax disputes expert at Pinsent Masons, the law firm behind Out-law.com.

Businesses will be required to provide a statement determining the employment tax status of contractors working through PSCs directly to the contractor, including reasons for the determination. Contractors will have the right to disagree with the determination through a new business-led status disagreement process.

In order to help businesses to determine the tax status of their workers, HMRC has developed an online tool called check employment status for tax (CEST), which is designed to determine employment status for tax purposes depending on the answers inputted to questions asked by the tool. HMRC says CEST is able to make a determination in 85% of cases. HMRC confirms in the briefing that it will launch an enhanced version of CEST before the end of the year.

In June the Chartered Institute of Taxation (CIOT) said that CEST needed significant improvement if businesses are to be able to make the correct decisions on whether the off-payroll working rules apply.

"It is a relief that HMRC has now confirmed that a revised version of CEST will be available prior to the April 2020 start date; however, it is disappointing that by the time the revised tool is introduced, businesses will only have a few months to use it to determine the employment tax status of thousands of contractors using PSCs," said Penny Simmons, a tax expert at Pinsent Masons.

Earlier this month, press reports suggested that some banks had informed contractors that they will not extend the contracts of contractors who provide their service through PSCs.