Changes are coming to the rules concerning off payroll working. This article explains the current situation and what needs to be considered to see if this is relevant to you as an ICB practising member or to any of your clients...
What is off payroll working?
The term off-payroll working covers situations where services are offered to a client which, depending on the nature of the work, could give the individual concerned, and/or the client, a tax advantage over using an employee to carry out the same job role and explains how tax and NICs should be treated in such a situation. The general rules cover all types of businesses, including self-employed individuals and limited liability entities. The legislation does not cover those individuals who trade with customers (e.g. those who buy and sell goods to the public).
Background
Individuals offering services to clients may be working as self-employed persons (or as a partnership) invoicing the clients and being paid gross and will then pay their tax and NICs via the self-assessment system. Often ICB practising members are a prime example of this area of work.
However, many individuals (including ICB members), whilst still working on their own, operate under the banner of a limited liability entity (in this instance deemed a personal services company or PSC). Such individuals may start out as self-employed and move into limited liability status as their business grows or may set themselves up as a limited company from day one. In offering services via a PSC, the individual is acting through an ‘intermediary’ as it is the company that invoices the client rather than the individual carrying out the work.
The individual can then withdraw funds from their company in one of a number of ways. Quite often they will take a small (or zero salary) and withdraw dividends based on profits after corporation tax is paid. They will often work out the most cost effective way to operate this by looking at the balance between the personal allowance, taking a salary, the levels of dividend taxation versus PAYE, secondary NICs and corporation tax (normally all perfectly legal in its own way as long as everything is properly calculated and declared) and compare it with the amount of tax and NICs due on the same profits when operating as a self-employed individual. However this can be impacted by the IR35 rules for PSCs so reader beware. (Note: if funds are withdrawn by means of a loan and not a salary or dividend, then there are tax implications to this and a review is currently being undertaken as to how this loan charge should be calculated). Limited companies are set up for many reasons, only one of which may be tax considerations.
On the client side, the use of such invoiced services (whether from a self-employed individual or one who operates through a PSC) could mean lower overheads for them as, if they employed someone to carry out the work, they may have to pay HMRC secondary NIC contributions, offer holiday pay and statutory payments for sickness and child related absences (maternity, paternity adoption, etc.) thus making it cheaper to use a self-employed individual or a PSC.
HMRC introduced legislation (the off-payroll working rules) to prevent this happening and treats both self-employed and PSCs in exactly the same way when considering if these rules apply. This means that by setting up as a limited company simply to reduce the amount of tax/NICs that an individual pays may well still fall foul of the legislation.
There has recently been some publicity regarding certain high profile individuals in the world of television and sport who have operated under the banner of a PSC and been taken to court by HMRC (and lost their arguments) about their status for tax. This may have huge retrospective impacts on the amount of tax/NICs due to HMRC for past years’ contracts depending on how each PSC treated the amounts withdrawn.
What should businesses do?
Basically anyone who carries out work independently (i.e. is not employed) and provides services to clients, really needs to check, on a regular basis, their status for tax and NIC purposes for each client with whom they interact. They should also carry out this process each time they take on a client which could very well become a significant part of their business and provide a fairly high percentage of income. This includes both those who are self-employed, or who offer services via a PSC.
How do I find out my status?
HMRC offers an online service where a recommendation is given depending on given answers to the questions. You can find a link to this service (CEST) at:
https://www.gov.uk/guidance/check-employment-status-for-tax
In previous years this questionnaire asked only five straight forward questions (which were very easy to answer) but now it is far more complex with various sections, each containing several questions, covering information regarding:
· The people involved
· The worker’s duties
· Substitutes and helpers
· Working arrangements
· The worker's financial risk
Will I get a definite answer as to my status?
The first thing to point out is that when determining the status for tax in such a situation you are likely to see words such as should, may, probably, or possibly, rather than definitely. This is because there are a large number of questions that need to be answered and the status identified at the end will depend on the information provided at that moment in time, which may change as the relationship with the client develops. What starts out as a perfectly acceptable client/provider contract may have to move into employer/employee status at some stage as the relationship builds.
Consider the situation of the self-employed individual. If, in this capacity, they have complete control of what they do, when they do it, how they operate and the responsibilities they take on when offering a service, then they will probably be treated by HMRC as self-employed.
In the case of a (self-employed) ICB Bookkeeper, for example, this could mean having a varied number of clients, working from home, using their own equipment and software and being fully responsible for their own work, and invoicing under (say) a fixed fee system, they would most likely be considered by HMRC as truly self-employed. Charging hourly with no limit to the number of hours worked, or working in a client office, are situations that might make this decision less definite.
So, if they perform that same service, but are working within the client’s premises several days each week, using the client’s equipment and software, charging hourly for however long it takes, then they should consider if the relationship could be expected to fall into the realms of employment rather than self-employment. Remember, an individual may be both employed and self-employed at the same time. Each client needs to be considered independently of the others.
Try CEST out for yourselves for the way you operate with one of your larger clients – I worked through a fictitious scenario as both a sole trader and a limited company which I thought would return an answer of “self-employed” but the answer was returned as “This should be treated as employed for tax purposes” so reader beware! When I changed some of the answers my result moved to “You may have to be treated as employed for tax purposes” and finally to, “You would be considered as self-employed for tax purposes”. I believe the changes in the decision may have been due to the section on providing substitutes to carry out the work in the event I was not available. As ICB practising members now have to provide information on who their substitute would be in the event of incapacity to carry out their role (Continuity of Practice COPE), this could very well resolve any queries as it could form a part of the agreed contract.
For more inofrmation on the COPE please see: http://www.bookkeepers.org.uk/out/170130/Continuity-of-Practice-Guidance.pdf
To compound the issue, over the past few years, there has been a development in what is termed ‘worker’ status – all employees are workers but not all workers are employees! Workers may still be included in the PAYE system. Consider the case of various taxi and delivery companies who have recently lost court cases with decisions taken by the courts meaning that those “self-employed” sub-contractors will have to be treated differently, possibly allowing them certain employment rights such as holiday pay.
What is IR35?
Firstly note that IR35 does not apply to the self-employed individual but only to limited liability entities.
IR35 is legislation that governs how a limited company (i.e. the PSC) and other organisations (such as public sector bodies) must treat the tax situation where HMRC feels that the role should be one of employment not self-employment (i.e. off-payroll working rules) as explained above. The treatment currently depends on whether the final customer (the engager) is in the public or the private sector.
If the engager sits within the public sector, it is up to the engager to determine whether IR35 applies. If it does, the public sector engager must place the sub-contractor’s PSC onto their payroll and will deduct income tax and National Insurance before paying the PSC.
If the engager is in the private sector, IR35 requires the intermediary (the PSC rather than the engager) to make any extra payments to HMRC to compensate for the additional tax and NICs that HMRC would have received on an equivalent employee's wages.
So at present, the off payroll rules deciding on how, when and by whom, tax and NICs should be paid for contracts with PSCs mean that the decision lies with the engager (if the contract concerned is in the public sector) and the PSC (if the contract concerned is in the private sector).
What are the changes being implemented?
From April 2020, any engager in the private sector who falls within the banner of being a large or a medium sized company, will need to operate under the same rules currently operated by any public sector engager. They have the responsibility and will have to look at the contracts they issue and decide if they fall within the off-payroll working rules, in which case they will have to deduct tax and NICs as if the sub-contractor’s PSC were employed.
Small and micro entities will remain under the current rules. The PSC will need to look at each contract to see if it falls under the off payroll rules and determine if they need to operate PAYE and NICs on any funds withdrawn from the PSC.
How might this affect ICB members?
If any of our ICB practising members themselves are medium or large companies then they would have to consider how they treat any other ICB practising member to whom they sub-contract work if it falls under the new off-payroll rules for limited liability entities. If they are themselves a small or micro-entity then the sub-contracted member is the one to take the decision (as they must do now)!
However, members may have medium-sized companies as clients, so in this respect might become involved in helping to decide on the relationship and payment of their clients’ sub-contractors and whether the new rules apply.
