Small is good but the Finance Bill doesn’t make it easy
In what we have seen so far of the Finance Bill, further detail has been given on the off-payroll working rules in the private sector, due to come into force on 6 April 2020.
These rules will result in private sector organisations, other than those qualifying as small, having to consider whether to deduct tax and national insurance from payments they make to contractors operating through their own limited companies. This will increase the cost of those contractors caught by this new regime by at least 13.8%.
Exemption from off-payroll working rules for small organisations
The main tests for determining whether an organisation is “small” are still taken from the Companies Act 2006. To be treated as small two of three conditions need to be satisfied:
- Annual turnover of not more than £10.2 million;
- Balance sheet total of not more than £5.1 million;
- Number of employees not more than 50;
The change in the Finance Bill is that now, in order to determine the accounting periods to apply these tests to, this must be by reference to the filing date of an organisation’s financial statements – and not the date the accounting period ends. This subtle change has introduced much complexity in determining whether an organisation can rely on this exemption.
We have also been told about the anti-avoidance rules for “connected persons” which are intended to stop an individual forming lots of companies that operate under their control, but with each individual company qualifying as small. In this situation, for the purposes of applying the turnover test only, the turnover of all companies under common control is aggregated.
Providing information to your contractors and managing disputes
The response to the consultation confirms that organisations who engage contractors through limited companies must provide the worker with not only the status determination but also the reasons for the determination.
It is expected that workers who have been categorised as falling within the off-payroll working rules will often dispute this determination status. The government has confirmed that every organisation required to operate these rules has a legal obligation to have a status disagreement process. Under this process, organisations must respond to challenges to status determinations by workers and consider with reasonable care any representations made within 45 days or they risk becoming liable for tax and national insurance liability themselves. HMRC once again is unsympathetic to the administrative burden this will place on businesses, as it anticipates that this work will be done by existing HR or procurement functions within these organisations.
Transferring liabilities for tax and national insurance up the contractual chain
One unpopular aspect of the consultation affected organisations which used one or more agencies in a supply chain that stretched back finally to the worker actually doing the job. It was originally suggested that, if an agency in the supply chain fails to pay the right amount of tax and NI to HMRC, the liability for these payments would pass up the supply chain until the liability was paid. This could result in the original organisation which engaged a worker through an agency being liable for large payments to HMRC, as a result of that agency going out of business through no fault of the organisation.
The government has made clear that the onus is on organisations and the first agency in a supply chain to make sure that they have carried out due diligence on the businesses with which they are contracting. This is part of HMRC’s drive to discourage businesses from using agencies that might be established offshore, and more likely to disappear without warning.
Any hope that remained that the introduction of this regime would be delayed is now ended. Organisations need to establish very quickly if they can rely on the small exemption and, if not, take steps to ready themselves and the contractors they deal with for a fundamental change in how payments to limited company contractors are taxed.
This article was published in People Management Magazine on 12 July 2019. By kind permission from People Management Magazine reproduced on Moore Kingston Smith’s website.