April 2020 Changes to Off-payroll Working for Intermediaries (Personal Service Companies)
An intermediary or personal service company (PSC) is where an individual (worker) provides what can be considered employment services through the medium of a limited company (“the” intermediary). Such arrangements can avoid PAYE and National Insurance, and HMRC are not keen on these arrangements.
Off-payroll working rules
From 6th April 2020 how the off-payroll working rules are applied will change where the end-user is classed as a medium or large entity. The end-user is, by and large, usually the feepayer (ie the one engaging the PSC). This will have a significant impact on both PSCs who currently provide their services in this way, and also to end-user clients that engage PSCs.
Before 6th April 2020 if the PSC provided services to:
- The public sector - The end-user client (ie the NHS) must decide on the employment status.
- The private sector – The PSC must decide on the employment status.
From 6th April 2020 the off-payroll working rules are extended to medium or large-sized private sector entities (see below) that engage PSCs and will be responsible for deciding the PSCs’ ‘employment’ status.
Small private sector organisations (see below) won’t be affected by the new rules.
What the changes mean
If you are a medium or large sized entity end-user using the services of a PSC you will need to determine the ‘employment status’ of the PSC from 6th April 2020.
If you are a PSC providing services to a public sector client or to a medium or large-sized private sector client, your PSC should be given an employment status determination (called a ‘Status Determination Statement’), which will set out whether the end-user sees the PSC as a genuine ‘contractor’, or as a quasi-employee of the end-user where the engagement will fall under the PAYE regime. The reasons behind the determination must also be provided and if you disagree with this decision you can dispute it.
It is important as an end-user that processes are put in place now to not only determine employment status, but also to have a procedure in place that documents and communicates the reasons behind the decision taken. You must also have a procedure in place to settle any disagreements raised by the PSC.
If the end-user makes the status determination and the off-payroll working rules apply, then the end-user client is responsible for deducting tax and National Insurance from the PSC’s fees and paying it to HMRC. The end-user is also responsible for paying any secondary Class 1 NIC on the intermediary’s services.
If a PSC is potentially caught by the new rules then they may wish to open dialogue with their client now, because if the PSC is caught this will likely have a cashflow impact as the PSC will have tax deducted from its income. It may be necessary to revisit the terms of the contract to ensure there is no financial loss to the PSC if this is possible.
Definition of a Small, Medium or Large Sized Private Sector Client
To qualify as a small company, based on current draft legislation, a small company must meet at least two of the following three requirements:
- Annual turnover must be not more than £10.2m.
- Balance sheet total must be not more than £5.1m.
- Average number of employees must be not more than 50.
If the end-user client doesn’t meet two of the three criteria above, then it will more than likely be classed as a medium or large entity, meaning the new off-payroll working rules will apply.
The above limits are based on stand-alone companies, and the position is slightly more complex where, for example, a group relationship is in existence or the engager is a non-incorporated entity.
For unincorporated businesses there is a simplified test so that only the annual turnover test of £10.2m applies.
There are quite onerous rules regarding the interaction when a company first becomes large under the new rules, and the detailed mechanics are outside the scope of this blog, but broadly speaking:
If an end-user ceases to be small in a particular tax year, that entity will only be subject to the new regime from the start of the tax year following the Companies House filing date for the financial year in which they ceased to be small.
Here’s an example:
- A company first becomes large during the year ended 31st March 2021.
- The Companies House filing deadline for the 31st March 2021 accounts is 31st December 2021, which is in the tax year 2021/22.
- The first tax year following the Companies House filing date where the company became large is 2022/23.
- The above company that exceeded the small company definition during its year ended 31st March 2021 is brought into the new off-payrolling rules from 6th April 2022.
HMRC’s Check Employment Status Tool
This can assist both the PSC and the end-user client in deciding if the new rules apply: https://www.gov.uk/guidance/check-employment-status-for-tax
Provided honest answers are given this should be a suitable defence against an HMRC employment status challenge.
PSC Paying its Worker
If the off-payroll working rules apply then income for a PSC’s services will have had tax and National Insurance contributions deducted from them. This means that when you pay the worker (as classified above – but not general employees), you do not need to pay tax and national insurance contributions again on those fees, thereby avoiding any double payment of tax or National Insurance contributions.
The new rules represent a significant change in how businesses will engage with PSCs and it is important to start reviewing how businesses engage with PSCs as soon as possible. When the rules apply costs will increase because 13.8% employer class 1 NIC will be due, along with the apprenticeship levy at 0.5% where applicable.
It is important to note that the new rules will not affect smaller private sector end-users as per the criteria above.
It is important to put processes in place now, both as an end-user and a personal service company, to not only ensure compliance with the new rules coming into effect from 6th April 2020, but to ensure you are prepared for the change.
How Hallidays can help
Hallidays have a specialist tax team that can provide expert advice for you and your business. Please contact us on 0161 476 8276 or email email@example.com to learn more about how we can support you.