Off-payroll working rules for employers: what you need to know

As contractors prepare for changes to off-payroll working rules to come into force in April, many employers are still in the dark over their legal obligations.

In this blog, we’ll look at what the upcoming changes are and how they will affect you, as an employer.

 

What’s new?

From the 6 April 2020, new off-payroll working rules – known as IR35 – will come into effect in the private sector.

As well as employers, the legislation is primarily aimed at contractors who work through a personal service company (PSC), but could also cover partnerships, managed service companies or contractors working under another person.

Under the new rules, all medium and large-sized private sector clients (employers) will be responsible for deciding a contractor’s employment status, as opposed to current rules, where workers decide their own employment status.

The reforms come after reports of workers using PSCs to pay less tax, even though they are working as if they were employed by the client and their relationship is more similar to that of an employer-employee arrangement. This is sometimes known as “disguised employment”.

Because the new rules place the burden of responsibility of determining employment on clients, businesses should be prepared to implement the necessary controls well before the legislation comes into effect in April.

 

What employers need to do

As a client of a contractor working through a PSC, it will be your responsibility to determine if they are paying the correct amount of tax.

From April, employers are required to undertake this determination for every contract you agree with an agency or a worker. The official guidelines are as follows:

  • Pass your determination and the reasons for the determination to the worker and the person or organisation you contract with
  • Make sure you keep detailed records of your employment status determinations, including the reasons for the determination and fees paid
  • Have processes in place to deal with any disagreements that arise from your determination.

If the determination results in employment, you will need to deduct and pay tax and National Insurance contributions to HM Revenue & Customs via PAYE.

Where an employer fails to correctly identify a disguised employment scheme, the worker’s tax and National Insurance Contributions become their responsibility.

For help determining employment, businesses can use the Check Employment Status for Tax (CEST) tool, found here.

 

Exemptions

The new off-payroll working rules only apply to medium and large employers. According to the Companies Act 2006, a business is defined as ‘medium’ or ‘large’ if it meets two of the following criteria:

  • The company has a turnover of £10.2 million or more
  • The company has a balance sheet total of £5.1 million or more
  • The company has 50 employees or more

 

National Minimum Wage and workers’ rights

Self-employed contractors are not legally entitled to the National Minimum Wage or workers’ rights, such as paid holiday or statutory sick leave. However, if after determination a contractor has been deemed as an employee, they will be entitled to such rights and employers will have to accommodate for such changes.

 

Soft Landing

The new Chancellor, Rishi Sunak has also recently offered reassurance to contractors that HMRC will ensure a soft landing is in place for the first year following the implementation of the IR35 rules.

This means that HMRC will allow for a period of adjustment.

 

For help and advice with the new off-payroll working rules, contact our team of experts today.