Now a little over a month since the introduction of the Off-Payroll Rules, we’ve been reviewing what businesses have been doing in practice to ensure their compliance and some of the common issues that have been encountered.
A summary of the Off-Payroll Rules can be found here.
What have businesses been doing?
1. Identifying the End User
In most cases, it’s obvious who the End User is. Where there are several entities in a supply chain (such as agencies) however, greater consideration is sometimes needed. Generally, the End User will be the entity which receives the contractor’s services. Where it’s not known whether a contractor uses an intermediary, many businesses have been taking steps to find this information out. In some cases, this has involved auditing supply chains to ascertain whether any workers provided are engaged through an intermediary.
A common area of disagreement has been determining who the End User is in circumstances where a service provider uses contractors to provide a service. The Off-Payroll Rules provide that where a person or business receives a ‘fully contracted out service’, they will not be End User. The End User would instead be the ‘service provider’, as the entity in receipt of the contractor’s services. As most of the obligations under the Off-Payroll Rules (and the potential liability for not observing them) sit with the End User, some businesses are taking a cautious approach when it comes to acknowledging a service as a ‘fully contracted-out service’. Undertaking a clear legal analysis of whether something is a ‘fully contracted out service’ or in fact a ‘supply of labour’ can be useful for all parties in situations where it is not entirely clear.
2. Determining IR35 status and issuing Status Determination Statements
Whilst there is no prescribed form for a Status Determination Statement (SDS), it does need to be issued in writing, together with the reasons for the decision. In practice, we have seen most business making use of template SDS documents to set out a determination.
When it comes to making a determination, End Users need to be able to demonstrate the use of ‘reasonable care’. Those who have been doing this effectivity have typically taken steps to obtain sufficient information on how their contractors work in practice and have then applied the key legal principles which relate to employment status. Taking specialist legal advice on this process can help businesses to demonstrate the use of ‘reasonable care’.
3. Changing working relationships
In some circumstances, the relationship between an End User and can be modified to increase the chances of the contractor being outside IR35. We’ve seen a number of businesses review and make changes to the way that they engage with contractors to achieve a more preferable outcome. This can be useful in situations where a contractor’s existing status is borderline but won’t always appropriate, especially where it would be difficult to change the way a contractor works from a commercial perspective.
4. Bringing contractors onto the payroll
For contractors determined as being inside IR35, End Users will usually be responsible for deducting tax and NICs from any payments the make to them. Where an End User doesn’t pay the contractor’s intermediary directly, the End User should pass a copy of the SDS onto the entity that they engage with for the supply of the contractor (often an agency).
Whilst income tax and NIC deductions can be made whilst the individual remains a contractor, in practice many businesses are instead choosing to employee the contractor or engage with them as a ‘worker’. The reason for this is that if a contractor falls inside IR35 for tax purposes, it is likely they will also be entitled to employment related rights, such as paid holiday and pension contributions. Employing the contractor ensures they will receive such entitlements and therefore removes the risk of contractor later claiming for these.
We have also seen an increase in the use of umbrella companies. In some circumstances, umbrella companies can provide a simpler alternative to employing a contractor as typically the individual will be an employee of the umbrella company, with the umbrella company making the necessary deductions for income tax and NICs. Appropriate due diligence should be carried out on a proposed umbrella company, however, to ensure that they will be complying with their duties and obligations as an employer.
What’s next?
HMRC have stated that End Users won’t have to pay penalties for inaccuracies relating to the Off-Payroll Rules until 6 April 2022, unless there’s evidence of deliberate non-compliance. This should not be confused with not having to comply with Off-Payroll Rules, however. Whilst penalties may be waived, the relevant tax will still need to be paid.
Whilst business should already have arrangements in place to comply with the Off-Payroll Rules, don’t forget that compliance is an ongoing requirement and medium and large businesses will need to consider their obligations in respect of any new intermediary contractors that they may engage with in the future.
We offer a range of services to help businesses be compliant with the Off-Payroll Rules. If you would like to know more about how we can assist and the services we offer, please get in touch with our Employment Group on 0118 977 4045 or email us at employment@herrington-carmichael.com.
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This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.
