Where large or medium-sized organisations are paying workers via personal service companies (PSC) or agencies they will need to operate new procedures from 6 April 2021.
The new rules will apply to partnerships, LLPs and larger charities as well as limited companies. Only those organisations that would be classed as “small” under the Companies Act criteria will be outside of the new rules.
From 6 April 2021 the end user organisation will be required to determine whether or not the worker would be an employee of the organisation if directly engaged. That determination will need to be communicated to the worker and the agency supplying the worker, if relevant, and is referred to as a Status Determination Statement. The determination notifies the fee-payer that income tax and national insurance is to be deducted from payments to the PSC.
HMRC recommend that the end user organisation should use the Check Employment Status for Tax (CEST) software on the HMRC website to carry out the determination but that isn’t obligatory.
What if the worker disagrees?
Where the worker disagrees with the employment status determination they should contact the end user straight away setting out their grounds for disagreement.
The end user must provide a response within 45 days of receiving the disagreement. During this time tax should continue to be deducted in line with the original determination.
Would the worker be better off an employee?
The new “off-payroll” working rules mean that the worker pays the same amount of tax and national insurance as if they were an employee, but without the same employment rights.
Where possible the worker should consider renegotiating a higher rate of pay to compensate them for the additional tax and national insurance deducted. They may also need to consider what they do with their personal service company going forward.
End users can be liable for the tax not deducted
Where the agency or fee payer lower down the labour supply chain fails to deduct tax from payments to the worker’s company the liability passes up the supply chain such that the end user may be liable. This rule was introduced as HMRC have allegedly been defrauded by some structures set up by employment agencies.
Workers need to be aware of a number of schemes under investigation by HMRC.
End users should carry out due diligence and consider the wording of contracts with agencies supplying workers via personal service companies.
Current IR35 rules still apply where end user is “small”
The new “off-payroll” rules do not apply where the end user organization is “small” under the Companies Act rules. Thus, the current IR35 rules will continue to apply, with the onus on the worker’s personal service company to determine whether the worker would have been an employee if directly engaged.