The off-payroll rule changes were delayed until April 2021, giving everyone concerned some welcome breathing space. But the rollout of the rules to the private sector is back on the agenda. What do you need to know?
Size matters
One of the areas that generates the most questions about the rollout of the off-payroll rules to the private sector is the fact that small engagers are excluded. The Companies Act 2006 provisions form the basis of the definition of small but are modified to make the engager less likely to be considered small, to ensure that businesses don’t take inappropriate action to try to put themselves outside the rules. Firstly, remember that the size definition applies to the engager, who is the entity using the worker’s services. It’s not, for example, about using a small agency to source your contractors. For the engager to be classed as small the rules look at a mixture of financial measures and headcount over different periods of time depending upon whether the engager is a limited company, unincorporated such as a charity, or a sole trader.
Pro advice. Whilst the off-payroll rules don’t apply to the engager’s use of sole traders as there is no intermediary as there is if the contractor has a limited company, the engager themselves can be a sole trader.
An incorporated engager must look at the following over the two financial years (based on the reporting deadline) prior to the tax year start:
- annual turnover was not more than £10.2m (pro rata if either financial year was not twelve months)
- the balance sheet total in respect of assets was not more than £5.1m
- the average number of employees was not more than 50, calculated by adding up the number of employees (not contractors) each month and dividing by the number of months in the finance year.
Example. If two out of the three conditions were met for the two financial years ending on 31 March 2019 and 2020, meaning the Companies House deadline for year two is therefore 31 December 2020, then the off-payroll rules apply for the 2021/22 tax year.
For an unincorporated engager there is a simplified test: was turnover for the last financial year that ended at least nine months before 6 April more than £10.2m? If so, the rules apply for the tax year that starts at least nine months later. Example. For tax year 2021/22, nine months prior to 6 April 2021 is 5 July 2020. So if the financial year end was 30 June 2020 it would be that financial year’s turnover from 1 July 2019 to 30 June 2020 that would be considered, and if that was more than £10.2m the organisation must follow the off-payroll rules from 6 April 2021.
For a sole trader who doesn’t have a financial year, if their turnover was more than £10.2m at the end of the calendar year (highly unlikely) the rules would apply from the start of the next tax year. For example, if turnover exceeds £10.2m at 31 December 2020 the rules would apply for 2021/22.
Who can never be small?
A small entity which is part of a group can only be classed as small if the parent company of the group is classed as small for the tax year concerned, or it’s the first year of operation for the group. Figures for companies under common control, as opposed to groups, also need to be combined. For the rules on common control (which are in the Income Tax Act 2007 ) see Follow up . If the business is involved in insurance, banking, finance or pensions it cannot be small s.384 Companies Act 2006 . If the business was a public limited company at any time during its last financial year it cannot be classed as small.
Confirming your size
New rules have been introduced that require engagers to confirm to contractors/consultants what their size is so the contractor knows whether withholding may apply to their fee if the engager decides the rules apply to the engagement; this could of course inform the fee that is proposed. The engager has 45 days from receiving a request about their size to confirm this in writing. HMRC provides a template letter for this purpose (see Follow up ).
Pro advice. As being classed as small provides a huge competitive advantage to engagers as workers can be paid gross and consider their own status, it makes sense for them to confirm their size with all existing and prospective consultants/contractors at the start of each tax year.
Overseas issues
An engager who is not UK tax resident and does not have a UK permanent establishment at the start of the tax year cannot be required to consider the off-payroll rules . Equally, if the worker providing the services is not tax resident then the off-payroll rules do not have to be considered in respect of that engagement, but that does require that the engager has a lot of information about the worker’s personal circumstances before coming to that decision.
Pro advice. As there are now many more contractors based outside the UK working remotely because of the pandemic, it makes sense to take professional advice before assuming that a worker is not tax resident and that the rules do not apply.
If the UK engager is part of an international group, even if the group is not tax resident the income of the whole group is used to determine the size of the UK entity. These group rules also apply to overseas companies, limited liability partnerships and unregistered companies who are part of an international group.
When was the work done?
HMRC has clarified that only work that is undertaken from 6 April 2021 and paid for from that date needs to be considered under the new rules. So if a contract ends prior to 6 April 2021 even if payment is made after that date it can be made gross.
Status determination statements (SDSs)
Many engagers had already issued SDSs assuming that the rules were coming into effect in April 2020. These can still be considered as valid if the circumstances of the engagement and the worker have not changed in the interim period, so it may make sense to revisit any decisions in light of new or changed information.
Pro advice. It has always been the case that engagers should continually revisit status decisions to ensure they remain valid, and it is best practice to do this six monthly, perhaps in September and March (ahead of the new tax year).
Disputes
Whilst there is no time limit for a fee payer or worker to raise a dispute about the status assessment they have received, the dispute must be received before the final payment for the contract has been made.
Pro advice. There is no reason why the engager cannot give a deadline for a dispute to be raised if there is a disagreement with the conclusion when it issues the SDS.
Reasonable care
Engagers have been concerned since the rules were first confirmed as being rolled out to the private sector that they were punitive transfer of liability provisions that could mean that the engager was responsible for the contractor’s tax and NI as well as their own NI. Avoiding the transfer of liability provisions relies upon the engager demonstrating reasonable care having been taken at each stage of the off-payroll process:
- coming to a status decision
- issuing the SDS
- responding to a status dispute within 45 days of receipt
- withholding the tax and NI liabilities if they are the fee payer.
HMRC has now provided guidance as to what it considers reasonable care in its Employment Status Manual.
Trap. If there is any suggestion that the engager has acted dishonestly in reaching the status decision then the corporate criminal offence of tax evasion can also be considered by HMRC.
Whilst the off-payroll rules don’t apply to the engager’s use of sole traders, as there is no intermediary as there is if the contractor has a limited company, the engager themselves can be a sole trader. Engagers should continually revisit status decisions to ensure they remain valid.
The next step
Off-payroll working legislation: Chapter 10, ITEPA 2003: reasonable care
Basic principles: off-payroll working from 6 April 2021
General principles: connected persons
Off-payroll working legislation: Chapter 10, ITEPA 2003
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