Two pieces of legislation are looming that will have far-reaching consequences for all those in fit-out: New IR35 changes will be implemented in April for private sector contractors and Reverse Charge VAT comes into effect in October. So, in a nutshell, how prepared are you and what should you be doing between now and then? Liz Bridge of The Joint Taxation Committee offers advice.
Do you even know what ‘Off Payroll’ working means and why you need to know?
About 10 years ago there was an enormous recession, together with a fl urry of fear that HMRC would look closely at whether subcontract labour was really self-employed in the true meaning of trading independently and on their own account.
The result was that many of the people who were made redundant and or took early retirement decided to form their own companies and try to trade ‘self-employed’. In the falsely self-employed group, many more were moved off to agencies and intermediaries who helped them form their own limited companies to give a touch of legal class and possibly some legal protection.
Then everyone with their own legal company – a Personal Services Company (PSC) set forth to get work, ‘off payroll’. Many of the redundant and early retired simply went back to their old employers one, two or three days a week but those employers paid their PSC rather than putting them on payroll as part time workers. It was so much cheaper, there was not the burden of employers and employees NIC and the worker via his company could claim some expenses. Many of the intermediaries simply offered whole workforces back to their original employers for a fee which indicated that no NIC was being included.
HMRC fought back by introducing some rules known as IR35 which should have imposed PAYE on the PSCs, but everyone now seems to agree they never worked. So in 2017 HMRC introduced rules for Government Departments and local authorities that meant that if they used people in jobs that would properly, normally have been taxed under PAYE , they could not engage them via PSCs and agencies without being responsible for the PAYE debt. PAYE had to be applied to the movement of money arising from the local authority when it was passed through the fee payer to the PSC. If no PAYE reached HMRC the Government department was still responsible.
On 1 April 2020 that legislation applies to all large and medium companies in the UK -companies with more than 50 employees or a turnover of more than £10.2 million or assets on the balance sheet of more than £5.1 million. Even if you are smaller than this, you should watch and wait. This legislation has had such success for HMRC that it will come to a cinema near you very shortly, the year after next is my own guess.
So, let us imagine that you realise that your fi rm is a large or medium business, and therefore well in the cross hairs of the HMRC rangefinder. Make a list of everyone who works for your firm because your fi rm wants their services (but exclude anyone who is paid through the payroll).
Include especially the people who are known personally, invited to Christmas parties, have company business cards, drive company vehicles, your fi rms front door key, car park pass -all the paraphernalia that mean that they work side by side your employees and look very similar.
Widen the list to include IT consultants, project managers, engineers who are with your firm for long periods of time or regular days. And then add the names of your workforce who might consider themselves to be your workforce, or who other people might think are your workforce, but are not actually paid through your payroll.
You are then going to test the terms on which these people work with you using the HMRC CEST test.
It isn’t perfect but it will tell you whether HMRC consider the person is an employee. If so, the whole payment chain must be told that the fee payer must operate PAYE and if the fee payer (the firm paying the PSC) is your firm, PAYE must be set in place. It will not be a popular decision and there may be a lot of conversations about rates of pay to be had.
If they are self-employed on a CEST test, there is a measure of safety.
The CEST test also throws up some ‘maybes’ and that is where you must think about your appetite for risk and your capacity to change – and stick to – new contractual arrangements. If you decide that PAYE does not need to be applied but HMRC investigates and decides it is due, it is your fi rm on the hook for ever for the everincreasing
PAYE liability not an intermediary.
Liz is the secretary of The Joint Taxation Committee (JTC) and has been in post since 1990. Having previously worked for HMRC and the Building Employers Confederation (BEC), she is well-known within construction for her teaching on topical tax issues.
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If you have any questions regarding the upcoming IR35 or Reverse VAT, email them to firstname.lastname@example.org