Proposed reforms to the IR35 rules on off-payroll working due in April 2020 will impact an estimated 60,000 medium and large businesses in addition to public sector entities, say David Williams-Richardson, employer solutions partner, and James Tetley, corporate tax partner, RSM.
The rules will apply to organisations that engage off-payroll workers who operate via intermediaries, such as personal service companies (PSCs). The impact of these changes should not be underestimated, and sufficient preparation will be crucial.
What impact will this proposed change have?
On businesses in the recruitment sector
Recruitment agencies who are ultimately paying intermediaries such as PSCs will need to consider the status determinations made by their clients, and where applicable apply PAYE withholding and employer NIC. If there are other businesses in the labour supply chain each agency will be required to pass on the client’s status determination to the next party in the chain.
On end clients
The end user of the services (the client) bears ultimate responsibility for making status determinations, and for passing these on to the worker and any third party involved, such as a recruitment agency. If the end client is also paying the PSC direct, it will be responsible for accounting for PAYE withholding and employer NIC where the rules apply. System changes will also be required to help meet IR35 compliance and PAYE/NIC withholding obligations, where applicable, going forward.
What are the key issues for businesses?
One of the recurring themes from our discussions with businesses of all sizes is that they haven’t appreciated the extent of the work required to be ready for the start of the new rules on April 6, 2020. In many cases we have found this has been treated as a ‘payroll’ or ‘HR’ only issue, when in fact the new rules will impact many stakeholders within a business including payroll, HR, accounts payable, finance, procurement etc. The key issues for medium and large private sector entities and public sector entities to consider initially are:
1 How many ‘off-payroll’ workers operating through intermediaries such as PSCs do we have who will still be working with us after April 5, 2020?
This can be quite tricky to identify, and it is important to appreciate that you need to consider not only PSCs you contract with directly, but also any that end up working for you who you source via a third party such as a recruitment agency. It is important to remember though that if you are categorised as a ‘small’ business you will not have obligations under the new rules
2 Will these identified workers be impacted by the new rules?
One of the obligations under the new rules will be to apply reasonable care and issue a status determination statement to each off-payroll worker operating via an intermediary to notify them as to whether or not the new rules apply. Where the new rules apply the business that is paying the PSC will have an additional cost of the employer NIC at 13.8% and, where applicable, the apprenticeship levy at 0.5%.
3 What will your future policy be?
In many cases, after an initial assessment of the current off-payroll worker population, some businesses are deciding to change their future policy on the use of off-payroll workers, particularly where engagements are likely to be within the new rules which will result in additional costs to the business such as employer NIC at 13.8%. This is an important decision that will likely need the input of different stakeholders in the business as it may impact continuity and lead to a short-term resourcing issue.
New procedures from 6 April 6, 2020
Where an impacted business will continue to use off-payroll workers from April 6, 2020 it will be necessary to update processes and procedures across the business to ensure ongoing compliance.
This will include, for example, arranging communications with impacted workers, deciding who is making and issuing status determinations and who will be responsible for appeals. Consideration will need to be given as to what system changes and interfacing is required to identify incoming invoices from impacted workers and to operate PAYE/NIC withholding where required. Ongoing review will also be required so that status determinations can be revisited if there is a change in the contractual and/or working arrangements.
Can technology help?
Without the use of suitable technology, managing the obligation to demonstrate (including documenting, tracking and reporting) could be an administrative headache – and one that could potentially prove costly if handled incorrectly.
RSM has developed policy management software – 4policy – that can help you meet your reasonable care obligations, including educating your employees on your company policies and procedures, identifying levels of awareness, and crucially documenting their acceptance of these policies. This typically includes:
- creating a central repository of IR35 policies, procedures, guidance and forms;
- communicating materials and key messages to stakeholders;
- delivering online training;
- ongoing testing of knowledge around the business;
- monitoring and reporting on levels of acceptance; and
- task management through cyclical reminders.
In our experience, for many businesses the first step is to gather stakeholders within the business (operations, legal, HR, finance) for an initial workshop session to scope the potential impact of these changes. Our team at RSM, and in particular, David Williams-Richardson who has led the firm’s response to these changes, has chaired many such sessions, and would be very happy to discuss how these can be best structured to achieve clarity on the necessary actions that your business will need to take to prepare.