IR35: practical points to consider for your off payroll workers

Well, here we are, a few months on from the implementation of the new private sector rules for the use of workers provided via intermediaries (IR35). The new rules apply to medium and large businesses who engage a worker via an intermediary, either directly or via an agency from 6 April 2021. In broad terms, they move the responsibility for determining if a worker is an employee, and the responsibility for accounting for any Pay As You Earn (PAYE), away from the intermediary, such as a Personal Service Company (PSC), over to the payer of the PSC. What has not changed, is the responsibility for all engagers to consider the employment status of all of their workers who are not paid via payroll.

The rules are complex. I have set out below a few practical issues for engagers to consider and an example of the potential cost of getting it wrong.

1. It is not simply about PSCs
Although the 2021 changes relate to IR35 and PSCs, it is also essential for engagers to consider the position of any worker who is not paid through the payroll. If challenged by HMRC the engager should be able to demonstrate why any worker is not paid via the payroll (and subjected to tax and National Insurance (NI)). Ideally, engagers should be able to produce a schedule of all workers paid off payroll along with supporting evidence demonstrating why they consider that tax treatment is correct. The evidence is likely to include:

a) A copy of the self-employed contract between the engager and worker;
b) Details of what happens in practice (which should match the contractual terms);
c) The outcome of HMRC’s Check Employment Status for Tax tool (CEST) or other process to determine the worker’s employment status.

2. Can engagers rely on the result shown on the CEST tool?
The tool, which was introduced by HMRC in 2017, and has had a number of updates since then, may be used to determine the status of a worker. The tool relies on an engager answering a number of questions relating to the engagement of the worker and will produce a result as to whether the worker is employed, self-employed or “unable to determine” .

It is important to remember that this is an HMRC tool, which has been subject to some criticism, most significantly the fact that it does not take into account one of the key status tests in relation to Mutuality Of Obligation. However, HMRC states that it will accept the result, providing the tool has been correctly completed. Some of the questions on the tool are very subjective, and it is important that engagers also consider HMRC’s additional guidance on the tool that is shown in the Employment Status Manual.

3. What is the cost of getting it wrong?

For workers engaged as sole traders who are subsequently recategorized as employees, HMRC usually look to the employer to settle any historic tax and NI for the previous six years and will include interest and possibly penalties of up to 100%. It is also likely that any tax paid by the sole trader in respect of the engagement, (assuming they have paid their tax) will be set off against the liability.

For workers engaged via intermediaries who should have been subjected to PAYE (tax and NI) under the new rules from 6 April 2021, the potential exposure to the engager (or payer) will be from 6 April 2021.

4. How do the rules impact Non-Executive Directors (NEDs)?

A NED is regarded by HMRC as an “Office holder” for tax and NI purposes. Payments, with a few exceptions, such as in relation to NEDs provided by professional partnerships, should be subjected to PAYE (Tax and NI). Indeed one of the first few questions on HMRC’s CEST tool is “Will the worker be an Office Holder?” If the answer is “yes” then there are no further questions and the tool advises “Employed for tax purposes for this work”.

In addition, care should be taken with NED expenses as they may be taxable and liable to NI. In its booklet 490 HMRC confirm its view that if a NED attends board meetings at the same place on a regular basis then that place will be their permanent workplace for tax and NI purposes.

In summary engagers should:

identify any worker who is not on the payroll;
consider how they are engaged (which in some cases may not be as simple as it appears);
review the employment status for tax for that worker;
be able to demonstrate to HMRC’s satisfaction that they have adopted the correct treatment; and
understand the potential cost of getting it wrong.

Example

An engager has three off-payroll workers. All are sole traders and have been paid £35,000 for the past six years. The engager has not reviewed their status for tax purposes and has simply issued a standard contract. As a result of an HMRC visit in May 2021, it was decided that all three should have been employees for tax purposes.

The tax and NI liability could be between £250,000 and £275,000 for the six year period. It is difficult to calculate this precisely as tax allowances and NI limits may apply, but in broad terms the liability is calculated as follows: