Is it time to disclose your off-payroll working?
Oct 11, 2019
If you ever undertake work for a large or medium-sized organisation, and you are paid via your personal service company (PSC) or an agency, you need to get ready for new off-payroll working rules which are coming into effect from 6 April 2020. HMRC is going to be turning its attention to the private sector, as it rolls out the same off-payroll working rules which already exist in the public sector. You can read more about the background to this in our article from earlier this year.
The new rules will apply to limited companies, as well as partnerships, LLPs and larger charities. Only those organisations that are classed as “small” under the Companies Act criteria will be outside of the new rules.
From 6 April 2020, the end user organisation for which you undertake work via your PSC will be required to determine whether or not you would be an employee of the organisation if you were directly engaged. They will need to take into account legal ‘employment status’ issues such as supervision, direction, control and substitution. Their decision will then need to be communicated to you via your PSC or agency, so that any fees you receive will have the correct amounts already deducted for income tax and national insurance (NICs).
Your end user organisation may use the Check Employment Status for Tax (CEST) software on the HMRC website to help determine your status. A copy of this ensuing ‘status determination statement’ (SDS) should be given directly to you as the worker. If the outcome is that you are working as if you were an employee, then you will receive a lower net fee from the end user than previously, as your income tax and NICs will go straight to HMRC. The end user will also have to pay employer’s NICs on your behalf.
What if you disagree with the decision?
If you disagree with the employment status determination, you should contact your end user organisation straight away, and set out your grounds for disagreement.
Your end user must provide a response within 45 days of receiving your disagreement. During this time they should continue to apply the rules in line with the original determination.
How organisations may prepare for off-payroll working rules
Some end user organisations have started making plans now, ahead of the rule changes in April 2020. The biggest firms are auditing their existing arrangements with PSCs, and considering to what extent they are affected by the reforms and the need to implement the new rules. In many instances they need to negotiate new contract terms, and budget for additional costs. Barclays and Lloyds have become the latest businesses to inform their contractors that from 2020 they’ll only be able to continue working on a PAYE basis. Needless to say, these rule changes may have a significant effect on your relationship with your own end user organisation, and you may be forced to consider what position you want to adopt going forwards.
Under HMRC’s spotlight
Once the new rules come in, it is estimated that up to 170,000 PSCs are likely to be affected. This may result in a glut of HMRC tax investigations, as it determines whether PSCs have in fact been off-payroll working whilst paying insufficient income tax and national insurance over a number of years.
Nudge letters from HMRC
Ahead of next year’s rule changes, HMRC has already started to contact a large number of PSCs who provide services to the largest private sector employers such as Glaxo SmithKline. It is using scare tactics to ‘nudge’ taxpayers to review their tax position.
Although the letters may feel intimidating, they are part of a campaign to seek information rather than an official notification that HMRC is beginning investigations. If you receive one of these letters it’s important to take control of the situation. Use it as a prompt to review your contracts and working practices. Although HMRC is likely to point you to use its CEST tool, this has been widely criticised for its inaccuracies and poor wording – even HMRC itself has admitted not being able to rely on decisions generated from CEST!
The best course of action is to commission a third party contract review from an independent organisation, which can deliver a professional opinion on whether or not you are off-payroll working. This also provides evidence to HMRC that you are taking all reasonable steps to comply with your obligations.
Making a disclosure
As with many other areas of undisclosed tax, HMRC is far more lenient on those who make an unprompted disclosure. If you establish that from next April you will be off-payroll working, and that this would have applied to your current year contracts, you may well avoid all penalties by notifying HMRC without being approached first. If the letter to GSK contractors is anything to go by, HMRC is only looking at the 2018/19 tax year and if this is the case you will have time to correct your affairs for the year.
Off-payroll working is an incredibly complex area, and if you have concerns that you may be affected by the new rules then please do get in touch with the team at PT. We can make recommendations of whom to contact for a contract review, and help ensure that you are fully prepared for next year’s changes.