Off-payroll working tax changes to go ahead from April 2020 as planned

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, under draft legislation published by HM Revenue & Customs (HMRC) on Thursday. Contractors will have the right to disagree with the determination through a new business-led status disagreement process. The rules will broadly follow proposals outlined in a consultation earlier this year. A response to the consultation has also been published.

Penny Simmons, tax expert at Pinsent Masons, the law firm behind Out-Law, said: "With less than nine months until the reforms are introduced and given the significant compliance project that businesses with complex supply chains will have to undertake to prepare for the reforms, it is disappointing that the government hasn't listened to requests from across industry for a further delay."

"Much of the detail as to how HMRC will apply the rules has still not been published and is expected to be included in guidance. Despite HMRC's assurances in the response document that it will provide 'extensive support' to organisations to help them implement the new rules, businesses with complex supply chains and large flexible workforces are expected to struggle to meet an April 2020 deadline to prepare properly for the reforms; including reviewing and possibly altering their IT and compliance systems," she said.

Tax rules known as 'IR35' 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.

Once the new regime is in force, the engaging business will be liable for determining whether the IR35 rules apply and 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. Off-payroll working rules have applied to the public sector since April 2017.

Where a business engages with a PSC through an agency, the agency will be required to operate PAYE and pay NICs if the engaging business determines that IR35 applies. The business will be required to pass the status determination statement to both the agency and the contractor. If the agency fails to pay any PAYE or NICs due, the liability will pass back up the supply chain to the engaging business.

"It is reassuring that HMRC has confirmed that the ability to transfer tax liabilities up the supply chain is only intended in cases of non-compliance and not where there has been a 'genuine business failure'. However, it is disappointing that businesses still don't have greater clarity as to when HMRC will not seek to recover unpaid liabilities further up the supply chain and will have to wait until further guidance is published." Simmons said.

"Businesses with large numbers of PSC contractors are also likely to be concerned by the provision in the draft legislation for a business-led status disagreement process, which could lead to businesses having to handle multiple IR35 status disputes with contractors, with the risk of having to assume IR35 tax liabilities, which would otherwise be payable by an agency if they don't follow the process correctly," said Simmons.

Chris Thomas, an employment tax expert at Pinsent Masons,said that businesses are also likely to be concerned by the requirement to take reasonable care when making status determinations.

"Where a business is deemed not to have taken reasonable care, tax liabilities will transfer back to the business," Thomas said "However, at the moment, because HMRC is again choosing to legislate through guidance we don't know what 'taking reasonable care' means. HMRC acknowledges that making group determinations may be acceptable for contractors with the same role, working practices and contractual conditions, but even then they caution that only 'it may be appropriate in some circumstances', without expanding on what those circumstances are. There seems to be an expectation that determinations will be made on a case by case basis as per the public sector, without much recognition of the practicalities for the private sector."

"Given the lack of clarity on 'reasonable care', businesses will also be concerned that contractors may seek to use this as a weapon against them in the disagreement process," Thomas said.

HMRC has been advising large and medium sized businesses in the private sector to look at their workforce, including those engaged through agencies and other intermediaries, to identify those individuals who are supplying their services through PSCs. Businesses should then work out if the off-payroll rules apply for any contracts that will extend beyond April 2020.

HMRC has also been advising businesses to start talking to their contractors about whether the off-payroll rules apply to their role. Businesses should also put processes in place to determine if the off-payroll rules apply to future engagements. Further guidance is expected over the coming months.