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You are hereHome / Are you prepared? New PAYE rules apply for medium and large businesses from 6th April 2020

Chris Thomas Tax Director

23 Jul 2019

From 6th April 2020, all medium and large businesses will be responsible for ensuring that where a relationship between the business and an individual is an employment relationship, PAYE is operated.

History

It’s expensive to employ people. An employer has to operate a PAYE scheme, pay employers’ National Insurance contributions, pay auto-enrolment pension contributions, give holiday pay, offer support during maternity, administer sick and maternity pay, support parental leave, and if the employee is not performing, due process must be followed to ensure that their rights are not infringed. It is little wonder that businesses would rather not employ people.

Additionally, not all individuals want to be employed. Those with entrepreneurial spirit want to be treated as consultants: they want the cash flow advantage of not having tax deducted at source, they want the flexibility to move between jobs quickly and they want the ability to organise their affairs to pay less tax by employing family members and claiming expenses.

It is therefore little wonder that people have tried to avoid employment taxes since the advent of PAYE in 1944. This has resulted in regular case law being passed to determine whether a business has “employed” an individual, and therefore has an obligation to deduct tax from payments to them.

To circumvent employment taxes it became common for businesses to contract individuals through their personal service companies – no PAYE, no employment rights; and the individual remained flexible and could reduce their tax bills. Everyone was a winner – except HMRC. To combat this HMRC introduced legislation known as IR35, where the personal service company was liable to pay the PAYE if there was, in fact, an employment relationship. It transpired that there were two problems with this: i) HMRC does not have the resources to identify and deal with these personal service companies on a case-by-case basis, and ii) the market was being distorted with companies insisting that individuals contract through personal service companies.

Recent developments

From 6 April 2017 the IR35 legislation started to change. From this date the Public Sector became responsible for the proper application of PAYE where an employment relationship existed, even where the “employee” was contracting through a personal service company. This pushed the burden of operating PAYE (and the risk of failing to operate PAYE) back to the employer and away from the personal service company. Anecdotally, this change resulted in a mass walkout of IT contractors from HMRC who refused to be treated as employees, which is part of the reason for the delay of Making Tax Digital.

This experiment with local authorities, government departments, the BBC and other state-owned entities seems to have been successful, and this approach is being expanded to the Private Sector.

From 6 April 2020

From 6 April 2020 all medium and large businesses will be responsible for ensuring that where a relationship between the business and an individual is an employment relationship, PAYE is operated. This is the case even if the individual contracts through a personal service company, partnership or other intermediary. Failure to correctly operate PAYE will result in tax, interest and penalties being payable by the business.

Currently, this change only applies to businesses that are medium in size or larger. A business is considered medium if two of the following three criteria are met:

  • Annual turnover is more than £10.2m
  • Balance sheet is more than £5.1m
  • Business has more than 50 employees

Action to be taken

If you are a medium or large business it is essential that all of your consulting contracts and working arrangements are reviewed.

Determining whether a relationship is one of employment, is a very tricky exercise that takes into account a whole host of factors. Thankfully HMRC have a tool, called the Check Employment Status for Tax (CEST) tool. This is an online questionnaire that is completed confidentially. If this questionnaire is completed honestly, and the arrangements in place are not designed to manipulate the tool, the results can be relied upon in the event of an HMRC investigation.

If a business has any contractors that are determined to be employees by the tool, their arrangements should be revisited or the individuals concerned should be employed.

Small businesses

These measures do not affect small businesses, who are free to use contractors through personal service companies without the risk of PAYE penalties. But it is expected that this will change in the next few years. Small business should therefore use the CEST tool to see what their exposure may be, and work towards renegotiation contracts to comply with the regulations.

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