UK construction tax changes and the IR35 off-payroll working rules
If you mentioned construction tax changes last year, the focus was mainly on the construction VAT reverse charge (which has been postponed to October this year).
However, there is another tax change due in April this year, which will impact on the construction industry – the law relating to IR35, also known as the off-payroll working rules, is changing, and will place additional obligations on medium and large developers and contractors who engage off-payroll workers and professionals. The changes will also place some additional obligations on public authorities, but public authorities have already been under an obligation to comply with the bulk of the off-payroll working rule changes for the last few years.
A government review of the changes is also underway at the moment.
This article aims to give a broad explanation of the IR35 / the off-payroll working rules, the forthcoming changes, what the government review is about, and what public authorities, developers and contractors may need to consider when engaging off-payroll workers and professionals.
What is IR35 / off-payroll working?
IR35, the off-payroll working rules, were actually introduced in 2000 so have been in place for 20 years.
Under these rules, where the services of an individual (such as a worker or professional) are provided to a person or organisation through an intermediary (such as a personal service company) and that individual would have been an employee of that person or organisation had they been engaged directly, then the intermediary is liable for income taxes and National Insurance contributions as if the individual had received remuneration direct from the person or organisation. (These rules do not apply if that person or organisation engages the individual worker or professional directly ie not through an intermediary or personal services company.)
In other words, as the government guidance on Understanding Off-Payroll Working (IR35) explains: “the rules apply if a worker provides their services to a client through an intermediary, but would be classed as an employee if they were contracted directly”.
Essentially this means that these “off-payroll” workers and professionals do not get a tax advantage – because they cannot avoid paying the taxes and National Insurance contributions that other employees would pay by using an intermediary or their own personal services company.
The government announcement of its review of the changes to the off-payroll working rules (Off-Payroll Review Launched), referred to in more detail below, states that “those who do not comply with the rules pay significantly less income tax and NICs [National Insurance contributions] than an equivalent employee” and that the changes coming into force in April “are designed to tackle non-compliance with off-payroll working rules by making medium and large organisations in the private and third sectors responsible for determining the tax status of contractors”.
Broadly speaking, from a construction industry point of view, from 6 April 2020, the rules are changing to make all public authorities and medium and large developers and contractors (who meet certain criteria) responsible for looking into and determining the employment status of off-payroll workers and professionals that they use.
These off-payroll workers and professionals currently determine their own employment status and subsequent tax liability, but the changes mean that those engaging them now have an obligation to check this themselves.
The government guidance April 2020 Changes To Off-Payroll Working For Clients sets out who the rules apply to:
- “the rules apply to all public sector clients and private sector companies that meet two or more of the following conditions:
- you have an annual turnover of more than £10.2 million
- you have a balance sheet total of more than £5.1 million
- you have more than 50 employees”
- “a simplified test also applies to some clients and considers annual turnover. You must apply the rules if you have an annual turnover of more than £10.2 million and are not: a company, a limited liability partnership, an unregistered company, an overseas company”
- “there are also rules which cover connected and associated companies. If the parent of a group is medium or large, their subsidiaries will also have to apply the off-payroll working rules”.
Public sector clients and private developers and contractors caught by the above must then apply the rules : “You’ll need to decide the employment status of a worker, you must do this for every contract you agree with an agency or worker. You’ll need to:
- pass your determination and the reasons for the determination to the worker and the person or organisation you contract with
- make sure you keep detailed records of your employment status determinations, including the reasons for the determination and fees paid
- have processes in place to deal with any disagreements that arise from your determination
If you are also the fee-payer and the off-payroll working rules apply, you will need to deduct and pay tax and National Insurance contributions to HMRC.”
The consequences of getting this wrong could then sit with the public authority, developer and contractor – because if they do not take reasonable care in determining the employment status of a worker or professional, and that worker or professional should have paid more tax or National Insurance contributions, then the tax and National Insurance contributions become the responsibility of the public authority, developer or contractor.
If the worker or professional disagrees with the determination of their employment status, then the public authority, developer or contractor must:
- “consider the reasons for disagreeing given to you by the worker or agency paying their intermediary
- decide whether to maintain the determination if you feel it is correct and give reasons why – or provide a new determination because you feel it was wrong
- keep a record of your determinations and the reasons for them, as well as records of representations made to you”
and must respond within 45 days of the worker or professional disagreeing with their employment status determination – failure to do so results in the worker’s tax and National Insurance contributions becoming the public authority, developer or contractor’s responsibility.
It is worth noting though that:
- the liability to assess whether the individual worker or professional would have been an employee of another person falls on the end-user (ie the person for whom the individual physically provides services), so the changes above only apply to the public authority, developer or contractor where they are an end-user
- liability to pay the unpaid tax will only fall on that end-user public authority, developer or contractor where they are the fee-payer for the individual worker or professional’s services – although even if they are not that fee-payer they will still have a responsibility to notify the actual fee-payer of its obligations
- as mentioned before, public authorities have been subject to most of these rules since 2017, so the changes affecting public authorities are relatively minor – namely that a public authority will now include a body specified in s23(3) of the Freedom of Information Act 2000 and companies connected with any entity that is a public authority. Importantly though, the April 2020 changes will bring the private sector and public sector in line with each other.
What the government review is about
On 7 January, the government announced a review of the above changes to the off-payroll working rules (Off-Payroll Review Launched) “to address any concerns from businesses and affected individuals about how they will be implemented”.
It also stated that the “review will gather evidence from affected individuals and businesses to ensure smooth implementation of the reforms” and that “the Government will hold a series of roundtables with stakeholders representative of those affected by the reform, including contractor groups and medium and large-sized businesses, to understand how the government can ensure smooth implementation of the reforms. The Government will also carry out further internal analysis, including evaluation of the enhanced Check employment status for tax (CEST) tool and public sector bodies’ experience of implementing the reform to the off-payroll working rules in 2017”.
The review is due to end in mid-February.
What to be aware of when engaging off-payroll workers and professionals
Public authorities, and developers and contractors should consider whether the changes to the off-payroll working rules will apply to them, including determining whether they are an end-user or fee-payer (and notifying any fee-payer as necessary) – and if they rules do apply they should also consider the following:
- consider your supply chains to identify any off-payroll workers and professionals
- review and determine their employment status
- notify them and their intermediary/company of your determination and the reasons for it
- keep a full record of any review you have undertaken and determinations you have made, including your reasons and fees paid
- have a process in place to deal with any disagreements over your determination
- keep a full record of any disagreements and the outcome of these, including the reasons and any records of representations made to you
- undertake regular reviews each financial year, and particularly when engaging a new agency, worker or professional or re-engaging an existing agency, worker or professional
- consider more widely how to best protect your business from the risk of an incorrect determination, even if this may result in greater cost by erring on the side of caution or employing workers or professionals directly as your own employees
- the new rules will increase costs to individuals as well as those who engage them – be prepared for individuals seeking to renegotiate their payment terms, and calculate the additional cost to your organisation and how you will cover this.
The government review of the changes to the off-payroll working rules (Off-Payroll Review Launched), mentioned above, refers four times to the “smooth” implementation of the changes to the rules, including saying that “the review will determine if any further steps can be taken to ensure the smooth and successful implementation of the reforms”.
As such, the focus seems to be on implementing the changes rather than reviewing whether the changes should go ahead, and so it seems likely that the legislation will still be introduced in April (and will not be postponed), although perhaps with a few tweaks depending on the outcome of the review.
With this in mind, public authorities, developers and contractors should continue to prepare for the changes to come into force in April.
Jeremy Smith, Partner, says: “The new rules are likely to have far-reaching consequences for businesses – businesses are more likely than workers to take the view that the rules apply and this will cause tensions between them. Some businesses may take the view that, rather than having to apply the rules, they will, instead, engage workers directly as employees with the attendant consequences.”
Visit the Womble Bond Dickinson website for more on the construction VAT reverse charge which is due to come into force in October 2020 (postponed from October 2019).