October 26th, 2020 / Insight posted in

Professional Firms Insight: new off-payroll working rules from April 2021

Professional firms using consultants need to ensure they are prepared for the new tax rules for off-payroll working. They were previously due to be introduced in April 2020 but were delayed for a year due to the Coronavirus crisis. Their introduction is now looming once again.

What do the changes mean for your firm?

The new rules mean that when a firm is working with individuals who provide their services through their own personal service company, the firm will be responsible for deciding if tax should be deducted at source from payments made to the company.

If you determine an individual is working as if he or she were an employee of your firm, the basic position is that you will need to deduct income tax and employee NICs from payments made to their company, and pay employer NICs (and possibly the apprenticeship levy) as well.

If your firm is paying an agency that has the contract with the individual’s personal service company, the agency will be responsible for the deduction of these payroll taxes. However, your firm as the end user of the services, will need to tell the agency, as well as the consultant, whether the off-payroll working rules apply.

The new rules will bring about a number of administrative requirements, including the obligation to issue “status determination” statements, and the need to establish a dispute resolution process.

Will these rules apply to all firms?

The new off-payroll working rules will apply to medium and large organisations, with an exemption from these rules being available for small organisations.

The test for determining whether an organisation is ‘small’ is taken from the Companies Act 2006. Simply put, to be treated as small, two of the following three conditions need to be satisfied:

  • Annual turnover of less than £10.2 million
  • Balance sheet total gross assets of less than £5.1 million
  • Fewer than 50 employees.

The detailed rules on the application of this test are complex so if you are on the borderline, please seek further advice from us.

What are the key risks for your firm?

  • There is a risk that, in deciding whether the rules apply to an engagement (i.e. whether an individual is working as an employee), you will make the wrong decision. The rules here can be very complicated and difficult to apply. HMRC has produced a tool to help, but it is widely criticised for not accurately reflecting the full range of case law on employment status.
  • Where there is a failure to comply with these rules, HMRC can potentially seek payment of the relevant tax and NICs from the end-client, even where the failure takes place elsewhere in the supply chain.
  • The cost to your firm of using a consultant where the off-payroll working rules apply could increase by up to 14.3% (based on employer NICs of 13.8% and the apprenticeship levy of 0.5%) unless you can pass on these costs through reduced rates.
  • Consultants may start to prefer working for smaller businesses who will not deduct tax at source from payment of their invoices.

How can we help you?

We are well qualified to assist you in preparing for the rules by:

  • Assessing your workforce to identify any consultants who fall under the new rules. Based on your knowledge of the working arrangements you have with your consultants, we can perform status determinations and review the contracts you currently have in place.
  • Reviewing your processes and systems to ensure that contracts for personal services are identified and handled correctly. This will include determining employment status, passing on the correct notices through the supply chain and ensuring the correct sums are processed through your payroll calculations.
  • Creating a dispute resolution policy to ensure that you can comply with your statutory obligations.

To help you start the process of understanding and applying these rules, we offer an initial meeting at a cost of £500 plus VAT. Please contact your usual Moore Kingston Smith adviser to arrange the meeting.