- The law is changing and business needs to take action to ensure the burden of operating PAYE is moved down
the contractual chain.
- Review of contracts in your labour supply chain is essential.
- Consider establishing an employment status disagreement process.
- Adopt robust internal procedures and audit to ensure status determination statements are provided and liability is limited.
The much-anticipated changes to the operation of IR35 for medium or large private sector businesses will have effect in relation to contractual payments made for services provided on or after 6 April 2021.
The new off-payroll regime for the private sector was due to be implemented in April 2020. Amidst the government's response to the Covid-19 pandemic, it was announced that changes to the offpayroll working rules will take effect from 6 April 2021, instead of 6 April 2020.
As with the earlier changes to the operation of IR35 in the public sector, the effect is to shift the burden of assessing whether the legislation applies (and operating PAYE where it does) away from the personal service company. All parties to labour supply chains (and in particular public sector and medium and large private sector end-clients) need to be aware of their obligations under the legislation, especially in light of the new mechanisms passing the liability for operating PAYE to other parties in the labour supply chain.
The changes – what do I need to know?
The changes that all parties in a labour supply chain need to be aware of are as follows:
- Classification as 'small' – where an end-client is considered 'small' for the purposes of the new legislation they are excluded from its application.
- Initial burden on end-client – 'unless and until' the end client provides the worker with a 'status determination statement', the end-client will be treated as the 'deemed employer' and responsible for operating PAYE in respect of the off-payroll arrangements.
- Passing liability along the contractual chain – after the initial burden has been shifted from the end-client by the end-client providing the worker with a 'status determination statement,' it will be the 'fee-payer' (being the entity closest in the contractual chain to the personal service company (or other intermediary)) on whom the responsibility for operating PAYE will fall.
- Provision of 'status determination statement' – the endclient is required to provide a statement of its conclusion as to whether the arrangements constitute disguised employment (i.e. if the contractual relationship with the worker was direct, would the arrangement constitute employment for income tax purposes?) and explain the reasons for the decision. This decision should be passed to the worker and the person or organisation the end client contracts with. Businesses should not be making blanket decisions in respect of all of their off-payroll arrangements, and are required to exercise 'reasonable care' in reaching their conclusions.
- Client-led status disagreement process – A worker (or the entity which has the responsibility for operating PAYE) can make representations to the end-client regarding the conclusion reached in any 'status determination statement'. The end-client must respond within 45 days of such representations and if the endclient reasserts its original conclusion it must provide reasons for this. If the end-client fails to respond and/or fails to provide its reasoning for reasserting its original conclusion within the prescribed timescale then the endclient will become responsible for operating PAYE in respect of the arrangements.
- Duty to withdraw 'status determination statement' if the end client ceases to be medium or large entity
- If the end client fails to comply with the requirement to notify the worker and the deemed employer that it is no longer within the ambit of the legislation it will continue to be treated as being medium or large (notwithstanding its actual classification) and will be treated as the deemed employer with the corresponding PAYE obligations and liabilities.
- Power to make regulation to recover PAYE in the event of failure – In addition, HMRC have the power to make regulations to enable them to recover any amount which a person should have paid under PAYE in respect of the deemed employment income payment from any party to the arrangements.
- HMRC announced a soft landing for the changes when the implementation date was 6 April 2020. It is unclear whether this will still apply when the changes are implemented in April 2021.
The key takeaway is wherever you sit in the labour supply chain, the onus is now on you to take action to ensure that the burden and risk of operating PAYE on any payments under off payroll arrangements (and the risk of penalties and interest for noncompliance) is shifted down the contractual chain.
Contract review in your labour supply chain is essential and amendments may need to be made to include protections and information flow obligations.
It is advisable to establish a status disagreement process suitable for your business.
Adoption of robust internal processes and audit of the same are required to ensure that: 'status determination statements' are provided (and the initial burden of liability is shifted), any representations regarding status are dealt with within the prescribed timescales (in accordance with a status disagreement process) and that end-clients continue to monitor their classification and notify if they fall outside the ambit of the legislation.
If you would like to discuss how we can help your business prepare for the impending changes to IR35, please do not hesitate to contact the Tax team, the Employment Team or your usual DWF contact.