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21 Aug 2019
by Robert Woodward

Why employers need to align off-payroll labour engagement policies with corporate governance

A fundamental change in the way that organisations engage workers outside of payroll is now definitely expected in April 2020, following the publication of draft legislation concerning off-payroll labour in the private sector.

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The changes concern the situation where a business engages a worker providing their services through an intermediary, such as a limited company or partnership in which they have a stake (usually referred to as a Personal Service Company (PSC)). And, if not for that intermediary, the worker would be deemed to be a direct employee of the business.

What’s changing

Currently if an employment is deemed, the PSC has the obligation to operate Pay As You Earn (PAYE)/National Insurance contributions (NICs) on the payments received from the end engager business. Furthermore, the assessment as to whether employment would be deemed is an obligation placed on the worker and the PSC.

In April 2017, the position changed for workers providing services to the public sector via PSCs.  This meant that the public sector body would now make the assessment as to whether employment would be deemed, instead of the worker. If the employment was found to be deemed, the public sector body would be liable to operate PAYE/NIC, unless there was a third party (such as an agency) between the public sector body and the PSC, in which case the third party would be liable to operate PAYE/NIC.

The new draft legislation essentially extends, with a few tweaks, these existing public sector rules to private sector businesses, and also to charities and not-for-profit organisations. It should be noted that the legislation is currently in draft form and still requires both parliamentary assent, so may yet be subject to change. The summary below, including pointers as to what organisations need to consider, is based on the draft legislation published on 11 July 2019.

Key elements to consider

A key difference between the public sector rules and the proposed extension is that, where the end engager is “small” (using the existing Companies Act definition and with similar provisions for non-corporate entities), the proposed legislation will not apply. If the end engager is small, the current position will continue to apply, ie the worker and PSC self-assess whether employment would be deemed, and act accordingly. The government estimates that around 1.5 million businesses will be “small” for these purposes.

Businesses that are not small and who engage with workers via an intermediary must consider whether the working relationship is one of employment. Where the business concludes that employment would be deemed, it must give the worker a ‘Status Determination Statement’(SDS) confirming its conclusion and the reasons behind that determination. 

Where the business has contracted with an agency for the supply of the worker and has concluded that an employment would be deemed, the obligation to operate PAYE/NIC is passed to the agency (and then to the organisation paying the PSC if there is an extended labour supply chain). If an agency is involved, the business must also give the SDS to the agency, and until it does so, the obligation to operate PAYE/NIC will not be passed on and will remain with the business.

The business must also implement a process to manage and deal with any disagreements submitted either by the worker or any other affected party in the supply chain. This is because the proposed legislation introduces a mechanism whereby appeals against an SDS can be made within 45 days of receipt. Where an appeal is received, the business must either affirm its previous decision or provide a new SDS and withdraw the previous one. Any PAYE/NIC obligation will remain with the business until a response to an appeal has been given. Note that HMRC will not get involved in any disputes between parties.

The need to prepare

In preparation for the changes, businesses will need to identify the engagement of workers through PSCs in their supply chain. Where such workers are identified, status determinations will need to be carried out to identify anyone whose engagement would be caught (or potentially caught) by the new rules.

There will need to be a commercial assessment on both the engagement of these workers in future and also on whether it is appropriate to engage workers through PSCs generally.

Businesses will need to consider not only the contractual arrangements with off-payroll workers but also their policies, processes and procedures for engaging with off-payroll workers generally, and should be looking to align their off-payroll labour engagement policies with their wider corporate governance obligations.

Businesses that have not already started planning for the changes will need to do so immediately to ensure they are well prepared for the new regime in April 2020.

BDO has a recorded a webinar on this topic: IR35 reforms - the time to act is now.

The author is Robert Woodward, associate director in BDO LLP’s Global Employer Services.

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