From April 2020 new rules were due to have been introduced that would impact companies engaging workers through Personal Service Companies, which could lead to increased costs. Due to the COVID-19 outbreak the introduction of these rules is now to be delayed until April 2021.
What are the current rules?
Currently, if a private company engages a worker on a consultant basis via their own Personal Service Company, there are no requirements for the engaging company to determine the employment status of the worker.
In 2017, HM Revenue & Customs introduced the off-payroll working rules for Public Bodies, such as Universities, NHS, local authorities, etc. This change effectively put the onus on the public body to decide if someone who works for them through their own Personal Service Company is caught by the intermediary rules (known as IR35). If they think they are, the engaging body must deduct PAYE and employee National Insurance Contributions (NIC) from any payment made to the Personal Service Company. This is to make sure that workers providing employee-like services through a Personal Service Companies pay broadly the same tax and NIC as an employee.
What is changing for private businesses?
From April 2021, the off-payroll working rules will be extended to most private sector businesses, meaning from this date private sector employers hiring individuals that have their own Personal Service Company will be responsible for determining their IR35 status.
Not all private sector companies will be affected by these new rules as the Government has announced that ‘small’ companies will be excluded from the changes. A company will be regarded as ‘small’ if it has two or more of the following features:
- Turnover of £10.2m or less
- £5.1m or less on its balance sheet
- 50 employees or fewer
Despite this exclusion, the change is likely to affect many contractors and individuals.
What should businesses be doing now?
It is important that private sector businesses act now to be fully prepared for the changes in April 2021. Those businesses meeting the conditions above will be required to:
- Determine the employment status of a worker. They must do this for every contract agreed with an agency or worker.
- Pass the determination and the reasons for the determination to the agency or worker.
- Ensure they keep detailed records of all employment status determinations, including the reasons for the determination.
- Have processes in place to deal with any disputes that arise from the determinations. Businesses must provide a response within 45 days of receiving the dispute
- Deduct and pay to HM Revenue & Customs tax and NIC from fees paid to Personal Service Companies from April 2021.
Early identification of those affected can enable discussions to take place between the two parties regarding the financial and commercial impacts of these rule changes.
Penalties
Businesses must take reasonable care when making a determination about the employment status of a worker. Failure to do so will result in the business becoming responsible for the worker’s tax and NIC liability arising.
Furthermore, failure to respond to a dispute within the 45-day window will also result in the responsibility for paying tax and NIC becoming the business’ responsibility.
Shorts are here to help
Shorts have a dedicated tax planning team ready to support businesses prepare for the new rules. In particular, we can provide assistance with determining workers’ employment status, liaising with workers as necessary and supporting the business with the appeals process.
Begin your journey with us today. Drop us a line and let's start talking about how we can save you tax.
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Stephen Allender
View my articlesTags: Business Taxes
