In a move that has been widely anticipated for some time, Chancellor Philip Hammond has announced a change that will materially impact those large and medium-sized companies engaging workers via personal services companies ('PSCs') from April 2020. Mirroring changes already made in the public sector, responsibility for operating the existing off-payroll working rules, and deducting any tax and NICs due, will move from individuals to the organization, agency or other third party paying an individual's PSC.
In light of the increased tax burden that this represents, users will have to consider carefully their compliance mechanisms and, more broadly, whether there is material benefit in using PSC structures for their indirectly engaged workforce.
What is changing?
Under the current rules, known as 'IR35', the PSC is obliged to deduct income tax and employee NICs from sums it pays to the worker, and pay employer NICs where, if the PSC were to be removed from the equation, the worker would be an employee of the client. Importantly, the liability for applying those rules (and the liability for back taxes if the PSC fails to do so) falls on the PSC, not the ultimate client.
Under the new rules, the PAYE and NICs obligations would fall on the client. Each time it engages a worker via a PSC, the client will need to assess whether, if the PSC were to be removed from the equation, the worker would be an employee of the client. If the worker would, the client will need to apply deductions for income tax and employee NICs from the sums it pays to the PSC, and pay employer NICs on those sums. Not only is this a potentially huge administrative burden and significant additional cost; it also places the tax risk squarely on the client and not the PSC/worker.
Along with the experience in the public sector, we are expecting that many companies will not want to take the tax risk on the supply of services where workers are claiming they are 'self-employed'. This could lead to difficult discussions with such workers.
What is not changing?
This does not impact the question of whether a worker engaged via a PSC benefits from employment rights as against the ultimate client. The test remains one where the client is applying a hypothetical assumption of whether the person would be an employee if the PSC were to be removed from the equation. Somewhat counter-intuitively, it does not necessarily mean that the worker is an employee of the client even if the client is obliged to deduct income tax and employee NICs and pay employer NICs.
The Government has stated that small organizations will be exempt.
What should those engaging workers through PSCs do now?
Those who engage PSCs should start thinking about their response to this change in earnest. Amongst other steps, we would recommend clients:
- Audit your existing workforce to establish how reliant you are on workers supplied via PSCs, as opposed to directly-engaged self-employed contractors, for example;
- Assess a representative sample of those contractors to determine whether you believe that the new rules will bite and require you to apply deductions for tax and NICs;
- Consider, in light of the results of step 2, the fundamental question of whether to continue engaging PSCs as before (reviewing on a case-by-case basis whether tax and NICs will be payable) or to more fundamentally redesign your non-employed workforce;
- Prepare your system for the new PAYE and NIC obligations.
The Chancellor has postponed the introduction of the new rules to April 2020 but companies should not be complacent in the meantime as HMRC already has an audit focus on this area. Further, companies should not under-estimate the scale of the task necessary to identify and modify existing arrangements.
The last few months have presented increasing compliance burdens for those engaging in non-traditional forms of working. To read more about how Baker McKenzie can assist you to engage your modern workforce in a compliant manner, click here.