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Off-Payroll Working Rules

IR35, also known as off-payroll working rules were introduced to ensure the working status of the individuals who work like employees i.e. they pay the same taxes as other employees’ do, irrespective of the structure they are working through. However UK government is of the view that not everybody is complying with the mentioned rule and furthermore the cost of non-compliance in the private sector has increased multi-fold, which is for sure not a desired outcome, especially when the government is clear that people who are working in a similar manner as a employee does then he should be paying broadly the same amount of employment taxes.

Her Majesty’s Revenue and Customs have been dealing with the above mentioned situation from quite some time now and finally decided to make certain reforms in the off-payroll working rules in order to have better compliance and while maintaining its commitment of supporting business and ensuring that UK remains an attractive place for those who wants to start their own business, it introduced a new reform in April 2017 under which the onus of determining your IR35 status has shifted from you to your client i.e. you no longer will determine and decide your working status and it will rather be decided by your client before he starts working with you.

Off-Payroll Working Rules For Private Sector

Also Read: What is IR35?

IR35 off-payroll working rules Change

The above mentioned change or reform is only about tightening up on non-compliance and thus there is no change in the IR35 and although HMRC has introduced and announced the reform in April 2017, same will not be implemented before April 2020 and thus gives ample time for the businesses to prepare for the desired change. Also government is very clear when it says that it is not a blanket decision i.e. there cannot be one decision for every business and contractor and thus businesses should and must consider each contract individually in order to make right decisions.

Also for a better understanding of the changes, HMRC plans to publish suggestions to help contractors if they are not in agreement with their client’s status decision. As per the changes suggestions made by the government in the off-payroll working rules and mentioned above, from April 2020, you will not determine your IR35 i.e. working status and it will rather be done by your client. However, your client need to examine your contract, determine your status and must inform you of his decision on your status before he starts working with you. The suggested change in the off-payroll working rules does not add any liability in the existing one and has ensured that the existing rules work as intended or desired.

Also Read: IR35 Checklist

Apart from determining the right status of the contractors, HMRC has made reforms in the IR35 off-payroll working rules because of the following reasons:

  1. It is not fair that two individuals working in the same way are paying different income tax and National Insurance Contributions (NIC), just because one is working as an employee whereas another one is working through a company.
  2. Also it has been observed that those who are working off-roll are paying less income tax and National Insurance Contributions as compared to an equivalent employee and if statistic is to be believed, then the estimated cost of non-compliance to the exchequer will touch £1.3 billion per year by 2023-24.
  3. One of the main reasons behind introducing the reform is to bring the private sector in line with the public sector and as per the estimate of HMRC, the reform is expected to raise £550 million in income tax and NICs in the very first year.
  4. HMRC has made it clear in its announcement that the applicable changes will only affect people who are working like employees and through a company and not to those who are self-employed.
  5. The suggested reform in the off-payroll working rules will not only increase compliance with the existing off-payroll working rules in the private sector but will also make businesses more responsible for assessing an individual’s employment status.

IR35 off-payroll working rules

In order to understand and consider the opinion of those who might get affected by the suggested changes in the IR35 off-payroll working rules, HMRC gave an option of consultation and received 275 responses from businesses, representative bodies, individuals working through PSCs, tax professional bodies, law firms, charities etc and while some of them gave only general comments, many of them provided answers and their views to all the questions posed in the consultation document and government has tried to incorporate as many valid suggestions and recommendations as it could and has come up with a final reform.

Also Read: IR35 Reforms Private Sector Reality

The consultation proposes number of possible and potential options to address non-compliance with the off-payroll working rules in the private sector, such as:

  • The consultation proposes to extend the public sector reform to the private sector and also invite views on the how to improve the existing rules and processes as per the private sector.
  • It emphasized on securing the labor supply chain i.e. to involve a number of checks on off-payroll workers supplying labor in order to see if they are tax compliant. However the checks could be compulsory or optional, but in the later case if a business is found to have a non-complaint labor supply chain, then its name should be announced publicly.
  • Asking the businesses that make payments to PSCs, either directly or through an agency, to retain certain information such as shift rotas, reporting requirements, contracts etc in order to have an easy access of these information by the HMRC in case of an enquiry. The main idea behind this point is by the time an enquiry is undertaken, HMRC already has most of the relevant data in order to reach a conclusion.

As per the new changes, the onus on determining the work status of contractors fall on the client’s shoulder, it is important for medium and large sized businesses to buckle up for the same and be fully aware of the changes to communicate effectively and work on the following points:

  • Determine the status of off-payroll workers: Once the reform is implemented i.e. from April 2020, the end-client will determine the work status of the workers or the contractors whom they are going to work with and thus it becomes imperative on client’s part to take steps in liaise with all the concerned parties and keep them informed about the decision as well. For many it may sound easy, but it is for sure a complex procedure; however there are various tools out there in the market which can help you determine the IR35 working status such as HMRC’s CEST Tool, Qdos, Status Review etc.
  • Liaise with PSC workforce to ensure no walkouts: In order to implement the changes, it is important for businesses to liaise and communicate well with those who are operating through their own Personal Service Companies because having a consistent and relevant dialogue is important to ensure that there are no walkouts, which can only happen if both the parties are fully aware of the decisions made because chances are there that the contractor is not in agreement with your decision and thus decides to walk out.
  • Train internal resources on IR35:One can determine the working status of the contractors only if he is completely aware of the IR35 rules and thus it is extremely important to train your internal resources completely on the IR35 so that they are well-equipped of following the rules. Also, as mentioned above, the changes made in the existing off-payroll working rules in not a blanket one and thus every case need to be monitored and studied on individual basis even if there is similarity in delivery of services within certain group of workers, it should still be considered and assessed individually.
  • Inform agencies of decisions: Once a decision has been taken and working status has been determined, the same should be informed to the agencies because they are the fee-payer and once it is clear that the contractor is working within IR35, the concerned agency will then deduct the correct PAYE and NICs as it would have done for an employee.

While the medium and big sized business need to work on how to inculcate the new changes, getting used to the same is going to be an uphill task because the suggested changes in the off-payroll working rules will put the contractors in a difficult position where they might feel lack of control.

In order to avoid such situation, one should consider the following points:

  • Open up a dialogue with your agency/end-client – Now that your tax-decision is no longer yours, it is important for you as a contractor to understand the intentions of your client and thus speaking with your client is best way to understand the reason behind the decision of your client regarding your work status.
  • Check your status: You can use various tools and services, for example CEST tool, to have a fair idea of what to expect regarding your work status.

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