The Off Payroll Working Rules (which come into force for the private sector on 6 April 2021) are designed to ensure individuals working like employees but through their own personal service company (PSC), pay broadly the same income tax and National Insurance Contributions (NICs) as individuals who are directly employed. The rules place new obligations on the end-user clients which engage such contractors. These rules are commonly referred to as ‘IR35’.
UK-based medium and large engagers (End-User Clients) will become responsible for assessing an individual’s employment status for tax purposes and operating payroll when appropriate. These changes will apply to all payments made for services provided on or after 6 April 2021. The rules were originally due to come into force on 6 April 2020 but were postponed because of the impact of Coronavirus.
End-Users have an obligation to exercise reasonable care when assessing the IR35 status of their off-payroll workforce. They must confirm their assessment together with reasons in a Status Determination Statement (SDS).
Whilst many End-Users will have already undertaken an IR35 audit process and issued SDSs to contractors in the run up to the original April 2020 roll out date, HMRC’s draft guidance set out in the Employment Status Manual (ESM10014) categorically states that End-Users must check existing individual determinations to ensure they remain valid and accurate and if changes are identified, a new SDS must be issued.
If the End-User fails to take reasonable care when making or updating a SDS, the responsibility for the deduction of tax, NICs and apprenticeship levy and paying these to HMRC will rest with them, even if they are not the “fee-payer” in the contractual chain.
In circumstances where End-Users do not continually consider IR35 Status or if incorrect Status Determinations have been reached in the absence of reasonable care, they run the risk of HMRC imposing severe penalties, consisting of the unpaid taxes, interest and penalties. Therefore, it is in End-Users interests to implement measures to demonstrate that they have taken reasonable care to check existing SDS and identify any changes.
What is “reasonable care”?
The draft HMRC guidance states that “reasonable care means clients should act in a way that would be expected of a prudent and reasonable person in the client’s position.”
The draft guidance acknowledges that what is necessary for each End-User to discharge the responsibility of reasonable care must be viewed “in light of their abilities, experience and circumstances”. For example, HMRC will expect a higher degree of care to be taken by a large multi-national company with its own internal finance function than of a much smaller entity. However, a smaller entity is likely to be expected to seek external advice as the draft guidance also notes that “in HMRC’s view, it is reasonable to expect a person with limited abilities, or who encounters a situation of which they have limited experience, to take care to find out about the correct tax treatment or to seek appropriate advice.”
What do we have to do to demonstrate reasonable care?
The draft guidance sets out a number of behaviours that HMRC consider would indicate an End-User has taken reasonable care including, but not limited to:
- Accurately applying and keeping a record of the employment status principles (ESM0500).
- Accurately completing HMRC’s Check Employment Status for Tax (CEST) tool.
- Applying HMRC guidance on determining status.
- Seeking the advice of a qualified, professional advisor.
- Having someone with a good understanding of the work to be undertaken involved in the determination process.
- Checking existing individual determinations to ensure they remain valid / accurate.
- Reviewing the processes being applied and amending for future determinations where necessary.
- If there are any material changes to a worker’s terms and conditions, or working practices, making a new status determination.
- Ensuring they check and review processes of other parties where they subcontract the determination process to another party. The End-User remains responsible for the accuracy of the SDS even if it subcontracts that responsibility to another party.
However, it is worth noting that the CEST test has been subject to criticism and HMRC themselves have refused to stand by a determination reached by CEST (RALC Consulting Ltd case) with the result that some End-Users are instead choosing to rely on other ways of assessing IR35 status. These include using an internal assessment, using other online IR35 tools and instructing external IR35 experts to review and assess their off-payroll workforce arrangements. End-Users may choose to use these methods in addition to also using the CEST tool.
Conversely, HMRC have made it very clear that blanket assessments (whereby an End-User determines that all workers who provide their services through a personal service company will be ”inside IR35” or “outside IR35”) will not constitute taking reasonable care. Where End-Users make blanket assessments, they will become responsible for deducting PAYE. Further examples of behaviours which do not constitute taking reasonable care include, but are not limited to:
- Determining that the off-payroll working rules apply to a large group of workers who have some variations between the work that is being carried out, without giving proper consideration to the different working arrangements for each worker.
- Failing to reconsider determinations where there has been a material change in circumstances.
- An absence of any proper support or training within the organisation to enable those individuals responsible for making determinations to properly consider the off-payroll working rules.
- Inputting inaccurate information into CEST.
- Failing to take into account all relevant evidence.
- The person tasked with completing the SDS does not possess the knowledge required to complete it and is not provided with the required level of support.
- The End-User subcontracts the SDS process to another party and does not confirm the accuracy of that conclusion and the reasons for it.
We recommend that End-Users review their off-payroll workforce now and consider what measures they will need to implement in order to demonstrate that they are taking reasonable care and have a framework in place to ensure ongoing compliance. We are assisting a number of clients with this process and are available to help.