One of the big changes for U.K. payroll professionals and wider teams within U.K. businesses to be aware of, from 6 April 2021, involves off-payroll working rules. These were designed to ensure that individuals (frequently referred to as contractors) who are working like employees, but through their own limited company or other type of intermediary, pay broadly the same income tax and National Insurance Contributions (NICs) as those who are directly employed for that contract.

The changes were initially due to be implemented as of 6 April 2020, but due to the outbreak of coronavirus, the government decided to delay the changes until the following tax year. This was in recognition of the pressure that businesses were already exposed to because of the pandemic.

The rules were already introduced within the public sector in April 2017 but will be expanded to the private and third sectors for any companies classified as being either medium or large. The rules basically signal a change in responsibility, as the onus for assessing the employment status of a worker is transferred to the engager/client within the supply chain.

Additionally, the same client or engager could become responsible for deducting Pay As You Earn (PAYE) and NICs from the fees paid to the worker’s company (they are referred to as the “fee-payer”). In more complex supply chains, the end-engager and the “fee-payer” may be different bodies. Previously, decisions were made by the Personal Service Company (PSC) in relation to the off-payroll working rules and payments to Her Majesty’s Revenue and Customs (HMRC) also submitted by the PSC.

Exemption for Small Companies

Upon confirmation of the extension of the off-payroll working rules, within the Budget 2018,

the exclusion for small companies was announced as follows:

“Small organisations will be exempt, minimising administrative burdens for the vast majority of engagers, and HMRC will provide support and guidance to medium and large organisations ahead of implementation.”

The Companies Act 2006 details what criteria results in a business being classified as small. During a 12-month period, a business is deemed to be a small company if it satisfies at least two of the following criteria:

1. Turnover that does not exceed £10.2 million
2. Balance sheet total of no more than £5.1 million
3. No more than 50 employees

The assessment must be based on the previous two years’ worth of filed accounts and must be reviewed after each set of accounts have been filed.

A business will always be deemed as small for its first financial year and will continue to be treated as such until it fails to meet the requirements to remain small.

If a business is small and subsequently not required to apply off-payroll working rules, then it is not mandatory for businesses to notify the intermediary/intermediaries it contracts with. However, it would be good practice to do so, as communication is a fundamental factor that will determine whether the reforms are a success. This will ensure that the intermediary understands its responsibilities, as failure to provide notification of size could mean that the intermediary assumes that the business is responsible for applying the rules, and so does not apply them itself.

Check Employment Status for Tax (CEST) Tool

HMRC has made available the Check Employment Status for Tax (CEST) tool that can be used to establish whether a worker on a specific engagement should be classed as either employed or self-employed for the purposes of tax. End-engagers responsible for making decisions are not required to use the tool and can use other methods to arrive at the decision but must be able to demonstrate that they have taken “reasonable care” in arriving at that decision. HMRC maintains that, where the information inputted is accurate and the tool used in accordance with its guidance, it will stand by the result produced by the tool.

In making a determination, there are four key areas for consideration. They are:

1. Mutuality of Obligation (MOO)—This is the obligation placed on the employer to provide work, and the reciprocal obligation on the worker to accept that work.
2. Integration—This is how far the worker is integrated into the end-user’s business, so whether the worker is, in effect, treated as though they are an employee. This could include points such as whether the worker is invited to the company holiday party, or if they have a desk at the client’s office, for example.
3. Control—Does the worker exercise control over when, where, and how the work is carried out, or does the engager? Is the worker able to send a substitute to carry out the work?
4. Economic reality—This assesses whether the worker is reliant on the hiring party to make a living, like an employee, or is self-reliant and independent, and therefore, like a contractor.

The CEST tool does not actually explicitly look at MOO, and HMRC’s stance on this is as follows:

“It is assumed that a person using CEST will have already established MOO, which is necessary for a contract to exist, otherwise there would be no need to be using CEST to determine the status of the existing or hypothetical contract.”

Status Determination Statements

The end-engager, or client, is required to provide a Status Determination Statement (SDS) to the worker, and to the fee-payer, where this is a different agency in the supply chain. Where there are several agencies between the client and the fee-payer, the client must pass the SDS down to agency one, agency one to agency two, etc. until it arrives with the fee-payer. The SDS must declare a contractor’s deemed employment status and provide adequate reasons for reaching this conclusion.

Failure to pass the SDS down through the correct channels can result in a transfer of liability. The liability will fall to the agency in the supply chain that failed to pass the SDS down the contractual chain. In circumstances where HMRC fails to collect the liability from that agency, then it will transfer directly back to agency one in the chain. If HMRC cannot collect the liability from agency one, then it finally transfers back to the end-engager. Therefore, the distribution of the SDS is so crucial, and so businesses should ensure that they are following the correct process.

If a contractor disagrees with the decision provided, then they can dispute it. The client has 45 calendar days in which to respond to this dispute and should have an appropriate status disagreement process in place.

Responsibilities

There are some clear responsibilities that arise from the changes to the off-payroll working rules, and whom they fall to depends on the structure of the supply chain. Where the client and the fee-payer are the same body, all those duties fall to them, but where they are separate bodies, different responsibilities will fall to each.

The client/engager is responsible for the following:

• Determining whether a contractor engagement falls within the off-payroll working rules
• Issuing an SDS and ensuring it reaches both the worker and the fee-payer

The fee-payer is responsible for the following:

• Ensuring that the off-payroll worker indicator is flagged on payroll software for the correct workers
• Ensuring that tax and NICs are deducted from the pay of the worker on any “deemed employment” payments. The apprenticeship levy will also need to be applied.
• Issuing Forms P60 and P45

There is no requirement for the fee-payer to ensure that student or postgraduate loan deductions are taken from the worker, and part of the reason that the “off-payroll” worker indicator is used is to ensure that Generic Notification Service (GNS) messages are not sent through for that worker.

Similarly, there is no requirement for the “fee-payer” to process any statutory payments, to provide a pension, or to pay at the National Minimum Wage (NMW) or National Living Wage (NLW) rates. Those individuals identified as being off-payroll workers will not receive any entitlement to holiday pay. The Employment Allowance cannot be offset against any payments made to off-payroll workers.

It has been confirmed that HMRC will commission external research into the impacts of the off- payroll working rules six months after their implementation.

The Chartered Institute of Payroll Professional’s (CIPP) advice to anyone who will be affected by the rules is to start preparing now by assessing their workforce, establishing which workers fall within off-payroll working rules, and distributing SDS to the relevant individuals (and fee-payers where applicable).

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Lora Murphy, ACIPP, joined the Chartered Institute of Payroll Professional’s (CIPP) Policy and Research team in September 2019. She has a wealth of knowledge and experience gained from more than 10 years of working within the payroll profession. She has experience delivering payroll solutions to colleagues in-house and also to clients using bureau services and has worked across a wide range of sectors. Her role also promotes the importance of education, training, and continued professional development for a profession whose value is often overlooked but is vital to ensure that employees and workers get paid accurately, first time. Murphy is eager to promote and raise the profile of payroll so that it gets the recognition that it deserves.