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What changed in April 2021
Many contractors or self-employed individuals operated through their own limited company, called a “personal service company” or PSC. Up until then the responsibility for deducting the correct taxes and National Insurance Contributions (“NICs”) rested primarily with the PSC, as did the liability for not paying these over to HMRC.
Following the changes, where a client is a large or medium sized company, a contractors tax status is now determined by the end user client to whom they provide their services, not the PSC itself. If the client decides that the engagement falls within the scope of the off-payroll working rules, payment to the contractor’s company is taxed at source as if they were an employee.
If the relationship genuinely falls outside the off-payroll working rules, then both workers and their clients can take advantage of the tax efficiency of working through a limited company. Clients do not have to pay employers’ NIC or provide employee benefits to contractors. The individuals themselves may also benefit from remuneration planning and limited liability.
Who do the post April 2021 rules apply to?
The rules apply where the clients are private sector companies (whether limited company or PLC) that meet two or more of the following conditions:
- an annual turnover of more than £10.2 million
- a balance sheet total of more than £5.1 million
- have more than 50 employees
This means that there is a small company exemption for organisations which do not meet two or more of the above conditions. There are also rules which cover connected and associated companies which are fairly complex. In summary, if the parent company of a group is medium or large, their subsidiaries will also have to apply the off-payroll working rules.
Since the small company test is applied to the parent company and not to any subsidiaries, this means that even if services are provided to a small subsidiary company if the parent company is a medium or large organisation, its small subsidiaries must apply the rules.
If the end user client is wholly overseas, the off-payroll working rules do not apply. Instead, the worker’s intermediary (usually a limited company) will be responsible for determining if the rules apply. An organisation is classed as overseas if it does not have a UK connection i.e., it is not resident in the UK or does not have a permanent establishment in the UK.
Conversely, if the PSC is a non-UK registered or non-UK tax resident company then the off-payroll working rules still need to be adhered to by the UK end client or agency, even where no tax or NIC is required to be deducted.
Determining employment status using a Status Determination Statement (SDS)
End user clients are required to assess the employment status of everyone they engage through their intermediary or through an agency. They must take reasonable care when making a determination, provide reasons for the conclusions and communicate the determination using an SDS to the individual or organisation in writing with which the client contracts.
HMRC has provided an online test – CEST (Check employment status for tax) to check whether individuals on a specific engagement, should be classed as employed or self-employed for tax purposes.
It provides the user with HMRC’s view of a worker’s employment status for tax and NICs based on the information inputted. It can also be used to check if changes to the contractual terms or working practices alter the employment status for tax and NICs.
In most cases, the CEST tool will determine the worker’s employment status for tax and NICs purposes. HMRC will stand by the result produced by the tool, provided the information entered is accurate, and remains accurate, and the tool is used in accordance with their guidance.
CEST provides three outcomes for users:
- Outside off-payroll working rules or self-employed for tax purposes;
- Inside off-payroll working rules or employed for tax purposes; or
- Undetermined.
According to HMRC’s own figures, CEST gives an ‘undetermined’ result in about 20% of tests. HMRC advises that in such cases that the user should consult HMRC’s online manuals, contact their helpline, or seek advice from professional advisors.
What should businesses ensure?
There is a legal requirement to identify individuals within the workforce (including those engaged through agencies and other intermediaries) who are supplying their services through PSCs and to review labour supply chains on an ongoing basis. The key question to be asked internally is: ‘Are contractors engaged directly or via umbrella companies or PSCs?’
Businesses should ensure that their processes are robust enough to analyse whether, when future engagements are made, in each case how payments will be made to contractors to stay compliant with the off-payroll rules.
Although this may seem obvious, management should ensure that the relevant processes are in place to keep detailed records of the employment status determinations, including the reasons for the determination and fees paid and to show how any disagreements that arose from the determinations were dealt with.
How we can help?
The Wilson Wright team have assisted many businesses with determining the employment status of their PSC contractors since April 2021. As the obligation is on the end user to get the determination right, taking professional advice with regards to specific situations, as well as enhancing internal procedures is advisable.
We continue to help our clients get to grips with the new legislation, including making disclosures to HMRC where needed, as well as amending the RTI filings and/or the contractor’s/PSC’s tax filings.
A year down the line, there are some companies that will not have fully grasped their obligation under these new rules and where you or your clients may need support in this area, please do not hesitate to contact us.
Contact our specialist team
- Emma Brown – Tax Transactions Partner
- Tel +44 (0)20 7832 0444
