The new Chancellor, Jeremy Hunt, announced that the off payroll working (IR35) rules introduced from April 2021 (6 April 2017 for the public sector) are to continue unchanged in a reversal of the proposed repeal announced by the previous Chancellor, Kwasi Kwarteng.
On the basis that the rules won’t change, now is a good time to check the level of your compliance with IR35 obligations. Particularly as the HMRC ‘light touch’ approach to penalties for inaccuracies that were not deliberate ended on 5 April 2022, and HMRC is stepping up its compliance activity.
Under the rules introduced from 6 April 2021, medium or large-sized organisations in the private and third sectors (excluding those that are “wholly overseas”) have the responsibility for deciding whether arrangements with third party intermediaries such as Personal Service Companies (PSC) do in fact represent a disguised employment. Where an arrangement is deemed to be ‘inside IR35’ on the basis that it is a disguised employment, then the fee payer is responsible for operating PAYE/NIC on payments, including employer NIC, and where applicable the apprenticeship levy.
The client using the services of the worker operating via an intermediary such as a PSC is also required to meet other obligations. For example, once the client has applied reasonable care and has determined whether the off payroll working rules apply to an engagement, it is required to communicate that decision in the form of a Status Determination Statement (SDS). It is also necessary for the client using the services to offer a status disagreement process to deal with any disputes regarding the SDS and respond within 45 days.
Where the client is defined as a small business by the Companies Act 2006, responsibility for assessing the arrangements, and applying IR35 where necessary, will remain with the workers intermediary such as the PSC.
Now that the IR35 intermediaries rules have been in place for over 18 months, our tax advisers, RSM, are seeing some recurring issues and misunderstandings within the sector around the rules, including:
Whilst employment status tests for workers providing services to a client via their own intermediary such as a PSC are the same as status tests for self-employed workers who are not operating via a PSC, the obligations that you have in relation to each differ and we often see confusion around this.
As above, obligations, and risk, in relation to the use of PSCs by a medium or large client apply from 6 April 2021 only, whereas your obligation to determine whether a self-employed worker is genuinely self-employed for tax purposes have been in place for many years under separate rules.
Where you are using the services of a PSC, then you are required to confirm your status assessment in a formal SDS and offer a status disagreement process. A formal SDS does not need to be issued when a self-employed individual is working for you, although ou must still assess whether or not they are genuinely self-employed, and you should keep a record of this.
If the status of a self-employed worker who is not operating via a PSC is assessed and it is determined that they have the features of employment, then they must be treated as an actual employee for both PAYE/NIC and employment rights purposes. Where a PSC worker is determined as ‘inside IR35’ then they are treated as a ‘deemed employee’ for PAYE/NIC purposes only and do not automatically have employee status for rights such as pension auto-enrolment.
Many housing associations engage with off payroll sub-contractors who are paid via the CIS. It is important to emphasise that obligations in relation to assessing employment status and IR35 must be undertaken for sub-contractors as they are for any off-payroll worker. It is only once you have determined that the off-payroll worker is outside IR35/genuinely self employed that you can make payments to them under the CIS. In this respect it is often overlooked that each monthly CIS contractor return requires a declaration to be completed confirming that the employment status of each individual included on the CIS return has been considered and it has been confirmed that they are not in fact an employee or deemed employee.
Much like many other organisations, housing associations often source temporary workers via third parties such as recruitment agencies. In this situation payments are made to the recruitment agency, but it is important to obtain confirmation from the agency on a worker-by-worker basis as to whether or not the worker is subject to PAYE/NIC by the agency.
If the recruitment agency is contracting with a worker operating via an intermediary such as a PSC and onwardly providing them, then the housing association as the client (i.e the end user of the worker’s services) has IR35 obligations, unless it is a small business as defined by the Companies Act 2006.
Importantly, the housing association must consider the status of the worker and issue a SDS to both the agency that it contracted with and the worker. Failure to meet this obligation can result in the housing association becoming liable for any PAYE/NIC due.
Due diligence on the labour supply chain is also important because, outside of IR35, there can be other tax and/or reputational risks if the worker is engaged by a party in the labour supply chain who is not correctly operating PAYE. For example, where the worker is working for a client in the UK, but is engaged by a party in the labour supply chain based outside of the UK who is not operating
In summary, for now at least, the off payroll working rules are here to stay and HMRC are stepping up their compliance activity following the end of the ‘light touch’ year for penalties. All housing associations should periodically review their compliance in the high-profile area of employment status.
Our tax advisors RSM work with many housing associations and other organisations with regard to their obligations under the off payroll working rules and would be pleased to help with any queries. For an initial discussion please get in touch with David Williams-Richardson.
RSM is a leading provider of audit, tax and consulting services, with around 3,800 partners and staff in the UK. We're working with our tax advisors RSM to help shape government policy on taxation as it affects the sector and to keep housing associations informed of key issues.Find out more