Draft legislation has been published for the much anticipated changes to the operation of IR35 for medium or large private sector businesses. The changes will have effect in relation to contractual payments made on or after 6 April 2020.
As with the earlier changes to the operation of IR35 in the public sector, the effect is to shift the burden of assessing whether the legislation applies (and operating PAYE where it does) on to the entity which is closest in the contractual chain to the personal service company (or other intermediary) rather than the personal service company. All parties to labour supply chains (and in particular public sector and medium and large private sector end-clients) will need to be aware of their obligations under the legislation, especially in light of the new mechanisms shifting the liability for operating PAYE to other parties in the labour supply chain.
Key changes – what do I need to know?
The changes that all parties in a labour supply chain need to be aware of are as follows:
- Classification as 'small' – where an end-client is considered 'small' for the purposes of the new legislation they are excluded from its application.
- Initial burden on end-client – 'unless and until' the end-client provides the worker with a 'status determination statement', the end-client will be treated as the 'deemed employer' and responsible for operating PAYE in respect of the off-payroll arrangements.
- Passing liability along the contractual chain – after the initial burden has been shifted from the end-client by the end-client providing the worker with a 'status determination statement,' it will be the 'fee-payer' (being the entity closest in the contractual chain to the personal service company (or other intermediary)) on whom the responsibility for operating PAYE will fall.
- Provision of 'status determination statement' – the end-client is required to provide a statement of its conclusion as to whether the arrangements constitute disguised employment (i.e. if the contractual relationship with the worker was direct, would the arrangement constitute employment for income tax purposes?) and explain the reasons for the decision. This decision should be passed to the worker and the person or organisation the end-client contracts with. Businesses should not be making blanket decisions in respect of all of their off-payroll arrangements, and are required to exercise reasonable care in reaching their conclusions.
- Client-led status disagreement process – A worker (or the entity which has the responsibility for operating PAYE) can make representations to the end-client regarding the conclusion reached in any 'status determination statement'. The end-client must respond within 45 days of such representations and if the end-client reasserts its original conclusion it must provide reasons for this. If the end-client fails to respond and/or fails to provide its reasoning for reasserting its original conclusion within the prescribed timescale then the end-client will become responsible for operating PAYE in respect of the arrangements.
- Duty to withdraw 'status determination statement' if end-client ceases to be medium or large entity – If the end-client fails to comply with the requirement to notify the worker and the deemed employer that it is no longer within the ambit of the legislation it will continue to be treated as being medium or large (notwithstanding its actual classification) and will be treated as the deemed employer with the corresponding PAYE obligations and liabilities.
- Power to make regulation to recover PAYE in the event of failure – In addition, HMRC have the power to make regulations to enable them to recover any amount which a person should have paid under PAYE in respect of the deemed employment income payment from any party to the arrangements.
The key takeaway is wherever you sit in the labour supply chain, the onus is now on you to take action to ensure that the burden and risk of operating PAYE on any payments under off payroll arrangements (and the risk of penalties and interest for non-compliance) is shifted down the contractual chain. Framing your contracts so that, where possible, this liability does not revert to you as a result of failings in the supply chain will be essential.
Contract review in your labour supply chain is essential and amendments may need to be made to include protections and information flow obligations.
It is advisable to establish a status disagreement process suitable for your business.
Robust internal processes (and audit of the same) will also be required to ensure that 'status determination statements' are provided (and the initial burden of liability is shifted), any representations regarding status are dealt with within the prescribed timescales (in accordance with a status disagreement process) and that end-clients continue to monitor their classification and notify if they fall outside the ambit of the legislation.
If you would like to discuss how we can help your business prepare for the impending changes to IR35, please do not hesitate to contact the Tax team or your usual DWF contact.