If you are an organisation which engages tradespeople, either directly or through an agency, who work via a personal services company (PSC), or a tradesperson working on that basis, then you should be aware that significant reforms to the off payroll working rules – more commonly known as IR35 – are being introduced in April 2020. Similar changes were made to off payroll working in the public sector in April 2017 and these changes are intended to bring the private sector into alignment.
Where the conditions in the off-payroll working rules apply, these rules will take precedence over the rules in the Construction Industry Scheme.
Although the draft legislation is not yet available, the government has now published its response to its latest consultation paper, so there is a degree of clarity as to what to expect.
What’s changing?
In short, the new rules will shift the responsibility for determining how the tradesperson’s fee should be taxed from the tradesperson and their PSC to the end-user (‘client’). Depending on the circumstances that could be the property owner or the lead sub-contractor. In the event that the rules apply, the client or, if intermediary agencies are involved, the agency fee-payer will then be responsible for deducting tax and other payments at source. Clients which fall within the definition of ‘small business’ are exempt from the changes.
Why the change?
One of the intentions behind IR35 was to ensure that individuals who provided their services through a PSC but who otherwise are difficult to distinguish from directly engaged employees would have to pay the income tax and national insurance contributions (NICs) which would have been payable had they been engaged, as an employee, directly by their client. Currently, in the private sector, responsibility for determining status and for accounting for income tax and NICs lies with the PSC. The government has long been concerned that there is widespread non-compliance with IR35 and the consequent shift in responsibility from PSC to client is designed to address this.
What do the changes mean for tradespeople?
Tradespeople in a labour supply chain, operating through a PSC (or another form of intermediary), will receive a status determination from the client together with reasons for the determination at the start of the contract. If the client determines that the tradesperson should be taxed as if they were employed, the client (or intermediary agency if involved) will deduct income tax and employee NICs from the fee payable.
What do the changes mean for clients?
Clients will be obliged to:
- determine the tradesperson’s status for tax in relation to an engagement;
- notify the tradesperson of the status determination and the reasons for that determination;
- if they are the fee-payer, deduct income tax and employee NICs from the payment and account for them to HMRC in the event that IR35 applies; and
- account for employers’ NICs.
Note: where the client is using a third party (usually an employment agency) to provide labour, the client must also notify the agency of the status determination and their reasons for reaching that determination. If income tax and NICs are to be deducted, it will usually be the agency (or the fee-payer in the event that there is more than one agency in the supply chain) which will be liable to make the deductions rather than the client. However, ultimate liability for accounting for tax and NICs on the fee paid will lie with the client if HMRC cannot recover from the fee-payer or contracting agency.
If the tradesperson in question is subject to PAYE and NICs as an employee of an agency or umbrella company, the arrangement will be outside the new rules.
Why are these changes significant?
Additional costs
The changes may result in additional costs in the form of employers’ NICs. In addition, fee payments taxed under the new rules may count when calculating the Apprenticeship Levy. Clients may well see an increase in fees to make up for any shortfalls in tradespeople’s’ net income as a result.
Increased administrative and compliance burden
The changes will, inevitably, create a significant administrative and compliance burden for clients which is likely to be particularly challenging for those clients which rely on large numbers of tradespeople working via PSCs. For example, clients will not only need to make status determinations at the start of a contract but will also need to monitor contracts on an ongoing basis to identify changes in circumstance which may alter the status determination.
Equally the requirement to notify the tradesperson of the determination directly is also likely to be problematic as many clients who use intermediary agencies will not know the identity of the contractor or how to contact them before they arrive on site. If the client is the fee payer they may also not have the information required to process the payroll, for example, NI number, date of birth, address etc.
In its consultation paper issued in March 2019, the government proposed that there should be a client-led process for resolving status disagreements between tradesperson and fee-payer and the client. In its response to the consultation paper, the government states that the legislation will set out the minimum requirements for a “status disagreement process” which will require clients to respond to representations made by tradesperson who disagree with the client’s status determination.
What should tradespeople do to prepare?
- be aware of the changes and understand the basis on which you are currently contracting, the likely status determination that will be made by the client in relation to the assignment and the consequent tax obligations where fees are to be paid after April 2020.
- consider whether it might be in your interests to seek to change your working arrangements with the client. For example many clients are reviewing their resourcing requirements with a view to offering opportunities for tradespeople to be taken on as workers, or in some instances, permanent employees. Additional employment rights will attach if so but fees may decrease.
How should clients who use self-employed tradespeople prepare?
- identify individuals who are currently engaged via a PSC either directly or via an agency;
- review any such existing contracts to identify which arrangements are likely to be caught – HMRC has an online tool known as CEST to assist with this. In the response to the consultation, HMRC states it is working on enhancing the CEST service.
- calculate the additional cost of employers’ NICs (and the effect on the Apprenticeship Levy if applicable).
- review the engagement of individuals via PSCs and determine an appropriate strategy moving forwards.
- be aware of the proposed practical issues around notification of status determinations, supply of reasons and be alert to the requirement to adhere to a “status disagreement process”.
- given the low cost benefit of using PSCs, companies may consider engaging tradespeople directly instead. However, tradespeople engaged directly would benefit from additional employment benefits, such as national minimum wage, paid annual leave and protection from unlawful deductions from wages. If the individual was to be viewed as an employee this would bring with it significant additional rights and protections.
This briefing gives general information only and is not intended to be an exhaustive statement of the law. Although we have taken care over the information, you should not rely on it as legal advice. We do not accept any liability to anyone who does rely on its content.
Annelise Tracy Phillips & Kate Redshaw
Burges Salmon LLP
One Glass Wharf
Bristol BS2 0ZX
July 2019