Off-payroll working from April 2020

From April 2020, new rules apply to businesses who engage off-payroll workers. In many cases, they will be required to deduct PAYE/NIC.

Who is affected?

The new rules apply when a business engages a worker who supplies their personal services through an intermediary, such as a personal service company (PSC), where the worker would be treated as employed if they were engaged directly. It is the responsibility of the business to decide whether the worker would be treated as employed under these rules.

Small company exception

Small companies are exempt from the new rules. A small company is one which can satisfy two of the following three conditions:

  • Turnover for the year not more £10.2 million
  • Total assets on the balance sheet not more than £5.1 million
  • The average number of employees in the year not more than 50

New requirements from April 2020

From April 2020, there be a number of new requirements for businesses in respect of off-payroll workers who provide personal services, including:

  • They must provide a written statement of the status determination and the reasons for reaching it to the company to whom it makes payments, and to the worker themself
  • They must determine the status of such workers, categorising them for this purpose only as ‘employed’ or ‘self-employed.’

Determining a worker’s status for tax purposes

It is not a straightforward matter to determine employment/self-employment status. To assist with this, HMRC has provided a tool called Check Employee Status Tool (CEST).

It should be noted that determining the worker’s status as ‘employed’ for tax purposes does not mean that they are actually employed by the end-client. The worker’s actual, contractual position is unchanged.

Agencies

In some cases, businesses will pay an agency, who will, in turn, pay the PSC. Where the engaging business determines the worker’s status as ‘employed,’ the agency will be responsible for the PAYE/NIC. The agency will also bear the cost of employer’s NIC.

Further implications for PSCs

Where a worker’s status is determined as ‘employed’ for tax purposes, the PSC will be unable to make tax-free travelling and subsistence payments to the worker or to pay tax-efficient dividends to the worker and his/her spouse.

Action required

Companies who do not qualify as ‘small’ should consider whether they have any workers who provide personal services, and are not on the payroll. If such individuals are expected to be paid after April 2020, it will be necessary to determine their status for tax purposes

Companies should ensure that copies of the status decision and the reasons for it are communicated before April 2020, and that they retain copies.

Where agencies are used, businesses should satisfy themselves that they comply with the new rules. Where agencies fail to account for PAYE/NIC, liabilities can fall back on the engaging business.

It should be stressed that there are no planned changes to the rules for paying freelance workers who do not operate via PSCs. Businesses should continue to check whether their status for tax purposes is employed or self-employed.

This article featured in issue 6 of our Manufacturing and Engineering newsletter series, The Engine.

Read The Engine Issue 6

If you have any concerns regarding the upcoming changes to requirements for off-payroll workers, then please get in touch with a member of our Business Tax team.