By Nick Bustin, Employment Tax Director, haysmacintyre
The next significant legislative change which organisations will need to consider relates to the IR35 legislation. At present, where an individual is engaged via an intermediary, normally a personal service or ‘one-man’ company, then the PAYE and Class 1 National Insurance compliance obligations rests with the service company.
The Government, through HMRC, have expressed considerable concern over the years about the lack of revenue the IR35 legislation was collecting. The first steps to rectify the ineffectiveness of the IR35 legislation started in April 2017 and saw changes within the public sector (as defined by the Freedom of Information Act 2000).
HMRC has now published its Policy paper and consultation document regarding the changes to the IR35 legislation which are due to come into effect from 6 April 2020. These off-payroll working rules determine who is responsible for determining the employment status for tax and National Insurance purposes of off-payroll workers.
The document indicates a clear intention as to how the Government proposes to introduce the new legislation and the purpose of the consultation is to help ensure its implementation.
Under the proposals, it is intended that medium and large sized businesses will be responsible for implementing the legislation. Consequently, smaller businesses will not be affected by the changes.
Operating the legislation
The responsibility for operating the legislation will fall to the engager, or client, who will be required to determine the employment status of the worker. There will also be a requirement to share the outcome of the determination with the worker and any entity within the worker supply-chain who may be responsible for paying the worker. HMRC have recommended that its Check Employment Status Tool (CEST) is used to help determine the status of the worker. However, CEST has been heavily criticised about its level of accuracy, as has HMRC regarding their opinions relating to mutuality of obligation. CEST is undergoing further redevelopment and it is hoped that a more accurate and realistic tool will be available for businesses to use ahead of April 2020.
The Government is not proposing to include any ‘appeals’ procedure within the legislation, it is their opinion that sharing the results of the engager’s determination with all relevant parties will help to address any concerns which may arise concerning the employment status of the worker.
Where there is a lengthy supply-chain between the engager and the worker, it will be the responsibility of the entity closest to the worker to apply the legislation and deduct PAYE and National Insurance. Furthermore, where the supply-chain includes any offshore entity, the obligation to apply the legislation will sit with the UK agency closest to the offshore entity. This approach is similar to those that apply within the ‘Agency’ legislation which was revised in 2014.
One key point to bear in mind is that where the engager is small, the responsibility to consider the IR35 legislation will sit with the worker, not the engager.
Where an agency sources workers for small businesses, they will not receive employment status determinations from that business and will not be required to operate PAYE or Class 1 National Insurance. However, we fully expect additional anti-avoidance provisions be included within the legislation to prevent any abusive practices being operated.
The tax legislation does not distinguish between executive and Non-Executive Directors (NED). A Director is an officeholder of a company and any income they receive from performing their duties as a director must be taxed as earnings.
It is not uncommon for the NED to invoice the company, typically via their personal service company, for the services they provide as a Director. Where this is the case the obligation to operate PAYE will sit with the personal service company. However, where there has been a failure to operate PAYE, HMRC will seek to recover any unpaid tax and National Insurance from the engaging company.
It is not uncommon for the NED to have more than one income stream from the engaging company. Where this is the case, two agreements should be established, one relating to the NED duties where the fees must be paid subject to the deduction of PAYE and National Insurance, and the second representing the other services provided by the individual. However, one needs to be mindful that the proposed changes to the IR35 legislation may catch any payments made for the provision of ‘other services’.
Nick Bustin, Employment Tax Director, haysmacintyre will be leading a session on Employment Tax in the Finance stream at the upcoming memcom conference on June 20th. This may be of particular interest to Board Members, Finance Directors and members of the Senior Leadership Team within membership organisations. Tickets to the full-day conference can be purchased from our event page on Eventbrite.
memcom is dedicated to serving professional associations, membership organisations and the wider not-for-profit sector. Our mission is to connect senior leaders to collaborate and to harness best practice – helping to drive the membership sector forward and celebrate its success. Our flagship events, the memcom conference and awards, takes place once a year. This year’s day conference will feature over 50 high-profile speakers and the most cutting-edge suppliers of the moment, all sharing their insight and expertise. memcom, as ever, will be stimulating a lively debate as well as providing real thought leadership. Tickets to the full-day conference can be purchased from our event page on Eventbrite. We also run many ‘memcom mini’ events throughout the year – upcoming events can be viewed on our events page.