A Guide to the new Off-Payroll Working (OPW) Rules
By Dan Chapman, Director
Introduction
You may have heard about upcoming changes to the off-payroll working rules expected to come in to effect this year, from 6 April 2020. Please note that as of 17th March 2020, this has been delayed to 2021 due to the Coronavirus Pandemic. If you are a sub-contractor operating via a personal service company (or other intermediary) or are a medium/large private sector company engaging these types of sub-contractors, you will need to consider the impact of ‘deemed employment’ under the rules. Sub-contractors may typically provide services in the IT or construction sectors to name but a few. The changes could have significant administrative, taxation and business implications for all parties involved in the supply chain, and may fundamentally alter the commerciality of your current business arrangements.
This blog outlines the upcoming changes, but as always if you’d like advice on your specific circumstances just call your local Hartley Fowler office.
Overview
The parties. When considering the OPW Rules, it is useful to first define the parties in the supply chain. Broadly, the OPW Rules apply to the supply of services by a Worker (an individual who does the work) via an intermediary (which may be a partnership, LLP or more typically a Personal Service Company (PSC)) to a Client (an organisation that needs the work doing). Often the Client contracts with the intermediary (say, the Worker’s PSC), rather than the Worker themselves, but there may be one or more agencies or intermediaries in the contract supply chain between the Client and the intermediary. The Fee-Payer in the chain is the organisation that pays the Worker’s PSC or intermediary and may be the Client itself.
Scope of the OPW Rules and IR35. The OPW Rules have applied to payments made by public authorities to intermediaries or PSCs since 6 April 2017, but from 6 April 2020 are expected to be extended to non-small Clients in the private sector. Generally, the OPW Rules operate to tax payments to the intermediary or PSC via payroll, where the nature of the engagement, absent the intermediary, has the characteristics of employment. Here the Worker is a so-called ‘deemed employee’.
The IR35 Rules, which should be distinguished from the OPW Rules, continue to apply to the supply of Workers in the private sector until 5 April 2020, and from 6 April 2020 in cases when the private sector Client is ‘small’ (see below). The IR35 Rules were introduced in 2000 and, when they apply, require the PSC to determine whether each engagement constitutes a deemed employment and to account for tax and NICs on the deemed employment income payment.
Please note that an individual’s or Worker’s status for employment law purposes is beyond the scope of this guide.
Who is affected by the changes from 6 April 2020?
Public sector changes. The definition of public authorities is expected to be amended slightly so as to include certain bodies and companies connected with them, which otherwise may have previously been excluded. The Status Determination Statement (SDS) and disagreement process, considered below, are also expected to be introduced to both the public and private sectors.
Private sector changes. The most significant change is expected to be the extension of the OPW Rules to the private sector. In particular, the change will need to be considered by both non-small businesses (or Clients) in the private sector and the Workers who engage with such Clients via their PSC or intermediary. Before 6 April 2020, under the IR35 Rules, it is the intermediary’s responsibility to determine the tax status of each of its engagements. From 6 April 2020, when the new OPW Rules apply, instead the Client is responsible for making this determination and in the case when the Worker is a deemed employee, tax and NICs must be deducted from payments to the intermediary and accounted for to H M Revenue & Customs (HMRC).
How is the size of the Client determined? The private sector OPW Rules apply to large/medium or non-small Clients. It is the responsibility of the Client to establish their ‘size’ for this purpose. Then, what is meant by ‘small’ for this purpose?
- Companies – The definition of the size of a company is taken from the
Companies Act 2006. A company is always a small company for its first financial
year and public companies are excluded from being small companies. Otherwise, a
company is a ‘small company’ if it satisfies two out of three of the following
criteria:
- The company satisfies two out of three of the size criteria (outlined below) in respect of the financial year under consideration.
- The company satisfies two out of three of the size criteria (outlined below) in respect of the preceding financial year (i.e. the financial year preceding the financial year under consideration).
- The company qualified as a ‘small company’ in the preceding financial year.
In respect of a financial year, in order for a company to meet the size criteria it must satisfy two out of three of:
- Its annual turnover is not more than £10.2mil. (Note: this threshold is adjusted pro-rata for financial periods not equal to a year).
- Its balance sheet total is not more than £5.1mil. (Note: the balance sheet total is the aggregate of the assets shown in the company’s balance sheet).
- Its average number of employees is not more than 50. (Note: this is the sum of the number of persons employed under contracts of service in each month, divided by the number of months in the company’s financial period).
In addition to the above criteria, the parent company of a group only qualifies as a ‘small company’ in respect of a financial year if the group headed by it qualifies as a ‘small group’. In order for a group company to be a ‘small company’, its parent company must also qualify as a ‘small company’.
Where a company is NOT a ‘small company’ in respect of a financial year, the OPW Rules apply for the tax year commencing after the end of the period for filing its accounts and reports for that financial year. Largely, this will be the tax year next beginning more than 9 months after a company’s balance sheet date.
- Non-corporates – A non-corporate Client is ‘small’ if is its turnover in respect of the financial year under consideration is not more than £10.2mil. (Note: this threshold is adjusted pro-rata for financial periods not equal to a year).
Where a non-corporate is NOT ‘small’ in respect of a financial year, the OPW Rules apply for the tax year next beginning after the period of 9 months from the end of that financial year.
The Client – Points for Consideration
Status Determination Statement (SDS). From 6 April 2020, Clients to which the OPW Rules apply will need to review each contract for services supplied to them by Workers via an intermediary and prepare a SDS setting out both their status determination and the reasons for that determination. The Client must then provide the SDS to both the party in the supply chain with which they contract (e.g. an agency, the Fee-Payer or intermediary) and the Worker. Each party in the supply chain must then pass the SDS on to the next party in the chain until it reaches the Fee-Payer. If a party fails to comply with these obligations, under the OPW Rules that party is treated as the fee-payer and must account for tax and NICs to HMRC.
The Client must take ‘reasonable care’ in making a status determination, otherwise the obligation to issue a SDS is not discharged and the Client will be treated as the fee-payer in the supply chain and responsible for accounting for tax and NICs to HMRC. The Client will also be treated as the fee-payer unless and until it provides the SDS to the Worker.
Contracts to which the OPW Rules apply. Determining whether a Worker has deemed employment status is required under the OPW Rules if the contract for the supply of their services is via an intermediary and any of the following apply:
- The intermediary is a company in which the worker has more than 5% of the shares and 5% of the votes.
- The intermediary is a partnership of which the Worker is a member and is entitled (either alone or together with members of the Worker’s family) to at least 60% of the profits or a partnership of which the Worker is a member and in which the Worker’s profit share is linked to payments under the contract and the majority of the partnership’s income derives from services supplied to a single client and its associates.
- The intermediary is an individual.
- If the Worker does not notify the Client whether or not any of the conditions in 1 to 3 is met by the intermediary.
Note that should fraudulent information be supplied by the intermediary (or persons connected with it) to the Client and based on that information the Client determines that the OPW Rules do not apply to that arrangement then the liability to account for tax and NICs passes to the intermediary.
Determining deemed employment status and HMRC’s Check Employment Status Tool (CEST). If any of above conditions are met, then it will be necessary for the Client to determine the Worker’s deemed employment status. The Client may choose to use CEST to make the determination, but it is not required to.
CEST is a tool developed by HMRC to enable stakeholders to determine the employment status for tax of a particular engagement. Broadly, CEST asks a series of questions which have been derived from employment tax case law over recent years, which once answered, gives an assessment of employment status for tax. The questions focus around the following aspects of the engagement:
- The right of substitution; and
- Tasks performed by the Worker (including the location, timing and level of control the Client has, if any, over the tasks); and
- The provision of equipment, transport, accommodation and materials; and
- The payment arrangements of the Worker; and
- Remedying an unsatisfactory standard of work and financial risk; and
- Benefits provided by the Client to the Worker, if any; and
- How the Worker holds themselves out to the Client’s stakeholders (e.g. to employees, other workers, customers, suppliers or third parties); and
- The Worker’s contract(s).
HMRC’s internal manual states in respect of the results of CEST, that: “HMRC will stand by the result produced by the service provided the information is accurate and it is used in accordance with our guidance”, but that “HMRC will not stand by results achieved through contrived arrangements that have been deliberately created or designed to get a particular outcome.”.
Consequences for Payroll and PAYE. If the Worker is a deemed employee, then the responsibility for accounting for and paying the tax (under PAYE), NICs and (if applicable) the apprenticeship levy falls to the Fee-Payer (which may be the Client itself). This information must be reported to HMRC via its Real Time Information (RTI) system. The Fee-Payer will report the taxable earnings from the deemed employment and pay the intermediary net of PAYE and employees NIC. Employers NIC and the apprenticeship levy must be borne by the Fee-Payer.
Here, deemed employment status applies for employment tax purposes only and will not confer any wider employment rights on the individual. As such, in these circumstances, the Worker is not entitled (via the Fee-Payer) to Statutory Sick Pay, Statutory Maternity Pay, holiday pay, national minimum wage, pension scheme auto-enrolment nor is the Fee-Payer required to make Student Loan deductions. Instead the Worker’s intermediary remains responsible for these entitlements and obligations.
The Worker/Intermediary – Points for Consideration
Disputing the Status Determination Statement (SDS). The SDS may be disputed by either the Worker or the Fee-Payer (the “Challenger”). The disagreement process is led by the Client and once an SDS is challenged the Client is obliged to respond to the Challenger within 45 days. There is no time limit in which the challenge must be made, but a prudent Challenger will do so as soon as possible after the SDS is issued to them, and in any case, prior to the first payment due under the contract and after 5 April 2020. The Challenger should provide their reasoning and supporting information for the challenge, and the Client should then consider this before either: (i) reaffirming its original decision and giving its reasons for doing so, or (ii) reversing its original decision and giving its reasons for doing so. There is not expected to be a procedure for appealing the Client’s decision to HMRC following the conclusion of this process, in respect of an ongoing or unresolved dispute by the Challenger.
Income received from a deemed employment. In respect of a deemed employment, a Worker will have received income from the Fee-Payer. The Fee-Payer will be responsible for issuing forms P60 and P45 to the Worker as a deemed employee and the Worker will need to consider their obligation to report this income on his or her Self-Assessment tax return for the relevant tax year.
HMRC guidance indicates that the net fee received by the intermediary for a deemed employment (i.e. after the Fee-Payer has deducted PAYE and employees NIC), may be paid onwards to the Worker either as, say, a tax-free salary (which needs to be reported via RTI as tax and NIC free) or as a tax-free dividend. Presumably this is on the basis that the fee received by the intermediary has already suffered tax and NIC as deemed employment income of the Worker.
Practical Points
Given the changes expected to the OPW Rules from 6 April 2020, what practical points should be considered by Clients?
- Does your organisation meet the size-requirements for the OPW Rules to apply? With the extension to the private sector, it will be necessary to determine whether your organisation is a non-small company or non-corporate entity in respect of the 2020/21 tax year and consequently whether you fall within the OPW Rules for the first time. Furthermore, annual reviews of the organisation’s size may be necessary to determine your ongoing obligations under the OPW Rules.
- Conducting a review of the supply chain. Consider preparing a list, or otherwise conducting a review of the supply chain, for individuals supplying their services through PSCs or other intermediaries and who are not on the payroll. For each Worker identified, you may wish to request their assessment of whether the intermediary they use falls within one of conditions 1 to 3 stated in the section headed “Contracts to which the OPW Rules apply” above. The Worker is obliged to respond within 30 days of the request.
- Carrying out an employment status review. In each instance where one of these conditions is met, or where the Worker has not notified your organisation whether or not these conditions are met, it will be necessary to carry out a review of the contract(s) with the intermediary to determine whether the Worker is a ‘deemed employee’ of the organisation. As outlined above, you may choose to use HMRC’s CEST tool for this, but you are not obliged to do so. One particular benefit of using CEST is that provided the information entered is accurate and in accordance with their guidance, “HMRC will stand by the result”.
- Notifying the Worker and intermediary (or other contracting party). Once a Worker’s employment status has been determined, and before making a payment towards new or existing contracts after 5 April 2020, your organisation should consider its obligations to issue an SDS to the Worker and their intermediary (or other organisation if the contract is with them as opposed to the intermediary). This should state the outcome of the review and the reasons for the outcome.
- Responsibility for implementing the OPW Rules. Given the changes expected from 6 April 2020,has anyone within your organisation been tasked with understanding and implementing the OPW Rules? Depending on the size of the organisation, the complexity of the supply chain and number of Workers, this may be a significant project in its own right and may affect a number of departments, e.g. Payroll, HR, Accounts, and Procurement etc.
- Timely review of new contracts. Depending on the organisation’s stance regarding the ongoing use of Workers, it will undoubtedly be necessary to consider all new contracts in the context of the OPW Rules on an ongoing basis.
- Responding to deemed employment status queries. Where the organisation has issued SDSs to its Workers, it will need to ensure that it has a robust and timely system for dealing with and responding to SDS disputes or challenges.
- Operating payroll. Once the organisation has identified and notified deemed employees, if it is also the Fee-Payer, it must ensure that the correct tax and NICs have been deducted and accounted for to HMRC. Some consideration should be given as to whether a new payroll or PAYE scheme should be established specifically for deemed employees, to segregate them from the organisation’s other employees. From 6 April 2020, it is expected that deemed employees will be identified on payroll by way of an OPW identification marker. In order to operate PAYE in respect of deemed employees, the organisation will also need to collate the following information from each of its Workers: full name, date of birth, NI number and bank account details (although this will be the account of the intermediary).
- Alternative methods for obtaining Worker’s services and budgeting for future contracts. Overall, in future, the organisation will need to consider how it chooses to engage its workforce and in which format that takes. Continued use of Workers with a deemed employment status will likely lead to the burden of employers NICs (at 13.8%) and the employment levy (at 0.5%) and this will need to be factored in to future budgets.
Given the changes expected to the OPW Rules from 6 April 2020, what practical points should be considered by Workers (or their intermediaries)?
- Engaging with the Client. Providing accurate information and working with the Client to determine employment status will be necessary from the outset to ensure that the OPW Rules are applied correctly.
- Requesting a size statement from the Client. There is no requirement under the OPW Rules for a Client to disclose its size to any other party in the supply chain. If an SDS is not received by the Worker, it may not be entirely clear whether or not a particular Client falls in to IR35 or, from 6 April 2020, the new OPW Rules, however a size statement may help to determine if the Client is ‘small’ and therefore outside the scope of the latter.
- Providing a copy SDS to the Fee-Payer. Although an original SDS should have been sent down the supply chain to the Fee-Payer, you may wish to consider giving the Fee-Payer a copy of your SDS to ensure the correct payroll treatment is being applied to the payments your intermediary or PSC is receiving.
- Disputing an SDS. Once you have received an SDS, you may wish to consider (or appoint an adviser to consider), whether or not based on the Client’s reasoning, you agree with their employment status determination. If not, in turn you should consider engaging the SDS disagreement procedure by contacting the Client, notifying them of your disagreement and supplying them with any additional information and reasoning for your disagreement, within the 45 day period allowed.
- Ongoing commercial arrangements and extracting funds from the PSC. If deemed employment status applies to one of more of your engagements, you may wish to consider methods of extracting funds paid to your intermediary and the tax implications of these. Deemed employment status may also result in a significant alteration to the commerciality of the current arrangements with your Clients and alternatives may need to be considered and discussed.
Disclaimer: The information in this blog is correct at the time of writing and is to be used as general guidance only. Please contact your local Hartley Fowler office for specific advice.
Hartley Fowler Services
So how could Hartley Fowler help you? At Hartley Fowler we seek to provide you with a comprehensive accountancy and taxation service and work with you each step of the way. Whether you are a Client, Fee-Payer or Worker using a PSC or intermediary, we would be glad to provide you with taxation and business advice in connection with upcoming changes in the OPW Rules. We are also proud to offer payroll services, if required.