On 18 May 2020, the Government published an updated version of the draft legislation implementing the proposed reforms to the private sector off-payroll working regime. Originally such reforms were intended to be implemented with effect from 6 April 2020 however, due to the impact of the coronavirus outbreak, the implementation of the reforms has been postponed until 6 April 2021.
A reminder: What is changing?
The current private sector regime applies where an individual provides their services (directly or indirectly) through a qualifying intermediary, to another person or entity (an End-User) in circumstances where, had the individual provided their services directly to the End-User, they would have been an employee (or office-holder) of the End-User. Where the regime applies, the intermediary is treated as having made a deemed employment payment to the individual, which in turn is subject to income tax and national insurance contributions. The responsibility for determining whether the regime applies and for accounting for any resultant income tax and national insurance contributions on the deemed employment payment falls solely on the intermediary, with no obligations or other liabilities imposed on the End-User.
Under the new regime it will, instead, be the End-User’s responsibility to carry out a determination as to whether an individual who is engaged through the qualifying intermediary would, if they were directly engaged by the End-User, be an employee or office holder of the End-User. If the End-User determines that they would have been their employee or office-holder, it will then be the organisation in the supply chain which pays the intermediary (the Fee-Payer) which will be required to include the individual on their payroll and account for the resultant income tax and national insurance contributions on any deemed employment payment.
Changes to the draft legislation
Much of the original draft legislation (published in July 2019) remains unchanged, and many of the changes that have been made reflect amendments which had been expected following previous announcements from HMRC and the Government.
The key changes to be aware of include:
- The conditions relating to when a company intermediary will be a qualifying intermediary under the new regime have been widened (see further comments below).
- A new requirement that End-Users need to have a UK connection in order for the new regime to apply has been introduced. An End-User has a UK connection for these purposes if, immediately before the beginning of the relevant tax year, it is either (i) UK resident or (ii) has a UK permanent establishment. If the End-User does not have a UK connection, the current IR35 regime will therefore continue to apply.
- End-Users are now under an obligation to respond to requests for confirmation as to whether or not they qualify as small for the purposes of the new regime, with enforcement by injunction (or specific performance in Scotland) if such confirmation is not provided within specified time limits.
- The provisions which allow HMRC to recover unpaid PAYE debts from other persons have been amended, making it clear that recovery can only be made from either the End-User or from the party the End-User contracts with and only in circumstances where HMRC consider there is no reasonable prospect of recovery from the Fee-Payer within a reasonable period of time.
- A time limit has been introduced for representations to be made to End-Users under the client led status disagreement process and new wording included which makes it clear that an End-User’s failure to comply with the process within the specified time limits will only result in it becoming the Fee-Payer under the new regime until such time that it does comply.
- Transitional provisions have been included ensuring payments made on or after 6 April 2021, but which relate to services performed before 6 April 2021, can be apportioned on a just and reasonable basis, with the new regime applying only to the part of such payment relating to services performed on or after 6 April 2021.
What are the changes to the qualifying conditions which apply where the intermediary is a company?
Where the intermediary through which an individual provides their services is a company, the original draft legislation required the individual to have a material interest in that company in order for it to fall within the scope of the new regime. Essentially, this required the individual to hold 5% of the ordinary share capital of the company, and thereby limited the scope of the new regime to companies which were personal service companies.
Under the revised legislation this condition has been widened to cover not only companies in which the individual has a material interest but also companies in respect of which the individual has rights which entitle them to receive payments or benefits which can reasonably be taken to be for the individual’s services to the relevant End-User (regardless of whether the individual holds any interest in the company).
This change is likely intended to counter strategies which seek to circumvent the material interest condition and follows similar drafting in relation to intermediary companies which is already contained in the current private sector regime. However, on its own, this amendment greatly expands the application of the new regime in circumstances where the intermediary is a company, and potentially undermines the steps that many End-Users will have taken to avoid the application of the new regime by removing personal service companies from their supply chains. This change could, for example, bring umbrella companies within the scope of the new regime.
It is hoped that further drafting will be introduced to narrow the application of these new conditions. The current private sector regime, for example, contains a requirement that the individual receives, or is entitled to receive, a payment or benefit that is not employment income, which would help to address many of the concerns the new conditions give rise to. However, unless and until such changes are made, End-Users will be faced with an even greater task when assessing the impact of the new provisions on their existing supply chains.
How we can help
We are experienced in advising clients on all aspects of the reforms to the private sector off-payroll working regime and are ideally placed to help navigate through the implications and consequences of the reforms. This includes helping you prepare for the changes, carrying out reviews of working practices and contractual terms and making any necessary changes.
For further information and assistance please contact your usual contact in the Employment team or David Smith or Richard Johnson in the Tax team.