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The IR35 off-payroll rules – what now?

IR35 off-payroll rules for a recruitment company

On 17th March 2020, just 2 days before the Finance Bill 2020 was published and only 20 days before the IR35 Off-Payroll Rules were to be implemented in the private sector, they were deferred until 6th April 2021.

Huge sighs of relief were heard throughout the recruitment industry, and there opened-up another opportunity for the reforms not to be implemented at all.

A few weeks later, on 27th April 2020, the Finance Bill Sub-Committee of the Economic Affairs Committee published its report on the draft Finance Bill. It was the House of Lords’ opportunity to permanently stop the Government from throwing the metaphorical tax spanner into the recruitment sector’s works. Given that the Government had said that it was “committed to learning from the experience of the public sector implementation”, there was surely hope?

But no. Despite the report concluding that the “Off-payroll rules build on a flawed system – IR35”, that “It is concerning that the Government has pressed ahead with the off-payroll rules at a time when the Taylor Review, which it commissioned, recommended a more holistic solution than these rules can offer”, that “no proper evaluation has been carried out into the effect of the off-payroll working rules in the public sector” and that “HMRC is imposing a heavy burden on businesses by requiring them to determine status using a complex, fact-specific test” it still seems to be going ahead.

Many recruitment businesses were ready for implementation on 6th April 2020, and although they were not exactly disappointed by the postponement, they were all set to take it on the chin. Many other recruitment businesses were not ready and exhaled a massive sigh of relief that they could stick their heads back in the sand. But as it’s not gone away, whether you need a refresher about what it means, or whether you do now need to face it head on, here’s a reminder of what the off-payroll rules will mean for recruitment businesses in the private sector:

 

  • The recruitment business will be the “fee payer” as it is the party immediately above the contractor’s PSC which is the “intermediary”. The contractor will be the “worker” and the client is, well “the client”.

 

  • The changes to the off-payroll rules do not apply to clients which are “small companies”. Clients will have a legal obligation to clarify the size of their company in the context of whether they are “small”.

 

  • Company size applies to clients, not to recruitment businesses/fee payers. A “small” recruitment business/fee payer is still responsible for applying the off-payroll rules.

 

  • Overseas clients with no UK presence will be excluded from having to consider the off-payroll rules. This means that the existing rules for private sector roles will continue to apply to roles where the client is wholly overseas. The intermediary/PSC will continue to determine the status of the worker.

 

  • The client will be responsible for issuing a “status determination statement (SDS)” which confirms the worker’s deemed employment status in a role. In off-payroll parlance, “inside scope” means the contractor is a “deemed employee” & “outside scope” means the contractor is “deemed self-employed”.

 

  • CEST is HMRC’s on-line tool for determining deemed employment status but it has received criticism over its reliability.

 

  • A deemed employee in an SDS must have their PAYE and NICs deducted at source by the fee payer. The fee payer is the one whom HMRC will pursue to recover any un-paid tax.

 

  • The changes to the off-payroll rules will apply to payments made to intermediaries after 6 April 2021 (as opposed to work done after that date).

 

  • If the client does not give the fee payer an SDS, the recruitment business will not have to deduct PAYE & NICs. The client will be the fee payer in the eyes of HRMC.

 

  • A recruitment business and a worker can challenge the client’s determination in an SDS. There are currently no time limits in which it must be contested. The client will have 45 days to respond to a challenged SDS, but the original one will stay in place during that period & must be complied with.

 

  • If the SDS determines that the worker is a deemed employee, the fee payer must calculate the “Deemed Direct Payment“ which is the amount from which it deducts PAYE and employee’s NICs, & on which it accounts for employer’s NICs. The fee payer reports the Deemed Direct Payment to HMRC and pays the Intermediary after PAYE and NICs.

 

  • The fee payer must not forget to factor in who is going to pay the employer’s NICs and the Apprenticeship Levy. The fee payer cannot recover or deduct them from the worker. That means there is an immediate 13.8% that must come from somewhere other than the worker. Fee payers cannot use their own Employment Allowance against national insurance payments.

 

  • The fee payer will have to decide whether to add off-payroll workers onto their existing payroll or open a new one with HMRC. It will need to obtain additional information from the worker like their National Insurance Number; and it will have to give the worker an end of year P60, and a P45 when they come off the fee payer’s payroll.

 

  • Recruitment businesses can pass the burden of “Fee Earner” on to an Umbrella Company, to sit between them and the PSC.

 

  • Fee earners will still need to deal with the VAT payment on the gross fees to the intermediary.

 

  • If an SDS says the worker is inside of scope, and deductions must be made, the fee payer does not have to pay holiday pay, statutory payments, student loan repayments or auto-enrolment payments. The off-payroll working rules determinate employment status for tax, not employment status for rights. (That is where I think it sucks most – employment tax but no employment rights.)

 

  • Agency Workers are different to intermediaries who are inside of scope. They are looked after by the Agency Worker Regulations, and they are entitled to holiday pay, sick pay etc.

 

  • How the worker has worked before April 2021 or any change to a worker’s deemed employment status that occurs because of the off-payroll rules and a client’s SDS, will not penalised by HMRC unless they suspect fraud.

 

  • Fee payers, clients or workers will not have to pay penalties to HMRC for inaccuracies during the first 12 months of the off-payroll rules unless HMRC sees evidence of deliberate non-compliance. This is being called a “soft landing”.

 

  • If the off-payroll working rules apply, the CIS rules will not.

 

  • In the Public Sector in which the off-payroll rules already apply, nothing will change.

 

So, there we have it, a year’s reprieve with nothing to show for it. And quite possibly a government message that having had an extra year to prepare, recruitment businesses will not have much of an excuse if they are not ready. If we can do anything to help, please do not hesitate to ask.

Lucy Tarrant

0333 400 4499

lucy.tarrant@cognitivelaw.co.uk