Earlier in 2018 the government consulted on whether to alter the so called ‘IR35 rules, in effect whether to transfer the IR35 obligations from the hired Personal Service Company (PSC) to the hirer of the service.

These extended rules were first introduced in April 2017, though at that time the changes applied only to hirers in the Public Sector. However the latest Budget 2018 documentation confirms that the new rules will be extended to the Private Sector, from April 2020.

Make no mistake this is a very significant switch in responsibility. Whilst the latest information suggests that the precise nature of the changes will themselves be subject to consultation (including perhaps exclusion of ‘small businesses’ from applying the new rules), at this stage it is fair to assume the new Private Sector obligations will mirror the Public Sector equivalent. This will mean:

• The body hiring the PSC and worker has to make a decision whether the particular contract is ‘caught’ within IR35. In short, the hirer must decide would the worker be their employee if the PSC had not been used. Employment status is of course a very complex employment case law test, which requires a full understanding of how the contract will operate practically (simply agreeing robust written terms will not be enough in itself).
• If the contract is caught, the body paying the PSC must deduct and account for PAYE and NIC before it pays the PSC. If the hirer pays though an intermediary agency or employment business etc., the hirer must inform the intermediary agency of the PAYE/NIC obligation.
• Apart from the extra cost to the hirer (e.g. the employer’s NIC cost) the practicalities of deducting PAYE/NIC at the same time as paying a limited company, which may have other obligations e.g. VAT payment, may mean that specialist software is needed.

What can be done?

We admit there is unlikely to be a ‘one size fits all’ solution that we can dust off the shelf. However the announced timescale and promised HMRC guidance should ensure that, with very careful planning and a flexible approach, any increases in outgoings can be managed.

Please contact ET4B if you would like to discuss this further.

ET4B’s Winter Newsletter 2018 looks at some of the more pressing matters currently on our, and our clients’ agendas.

One aspect affecting nearly all employers is the changes planned on treatment of employment termination payments. Upon implementation the changes are now being justified on a robust agenda of ‘fairness and clarity’, with the previous pretences of extra ‘simplicity’ and tax-neutrality having been dropped.  This presents the prospect of more work for employers and more tax/NIC to pay (for almost every employer and employee).

A few specific points of interpretation in respect of the new termination payments rules have very recently (14 February 2018) been clarified by HMRC in its February 2018 Employer Bulletin.

Firstly, HMRC has confirmed that payments made on or after 6 April 2018, but relating to a termination before that date, would fall under the ‘old’ rather than ‘new’ rules.

Secondly HMRC confirms that genuine redundancy payments (whether statutory, or non-statutory i.e. at enhanced rates agreed between employer and employee) should not be looked at under the new Post Employment Notice Pay rules i.e. they will still qualify for the £30,000 exemption. This is consistent with existing treatment which in effect goes as far back as the ‘Inland Revenue’ Statement Of Practice 1 of 1994 – so it would been a major disappointment if HMRC had decided to take a more stringent view here.

Finally the Employer Bulletin does confirm that the proposed withdrawal of Foreign Service Relief on termination payments from 6 April 2018 is still intended, but remains subject to further Parliamentary Approval.

Other than termination payments, the Newsletter looks at other hot topics concerning the government’s ongoing concern on employed v self-employed status, the increase in HMRC minimum wage reviews, changes in tax treatment of flexible benefits (or Optional Remuneration Arrangements to use the current terminology), possible changes to the way employee expenses are treated, and the proposed further uplift in taxation for diesel company car drivers.

We trust you find the Newsletter of interest. If you think we can assist, on these or any other employment/worker related matters, please of course contact us contact us.

ET4Bs Spring 2017 Newsletter includes updates on new legislation applicable to salary sacrifice and flexible benefits (or ‘Optional Remuneration Arrangements’ to use the latest terminology), as well as changes to ‘IR35’ obligations in the Public Sector and a range of other employment related updates.

A significant change effective from 6 April 2017 is the new legislation applicable to salary sacrifice and flexible benefits (or ‘Optional Remuneration Arrangements’ to use the latest terminology). Non-cash benefits provided to employees on an ‘Optional’ basis (i.e. where the employee has a choice whether or not to receive the benefit) will then be taxed on the higher of the amount of salary the employee gives up or the value of the benefit they actually receive. However, given that the most common salary sacrifices (pensions, employer provided childcare, and Cycle to Work schemes) will be excluded from the new rules, this seems unlikely to swell the Exchequer’s coffers as much as expected.

In our own view, the new legislation is extremely ill-conceived (both in concept and in practical application). Nonetheless, and despite reasonable objections and suggested alternatives being put forward by many professional bodies, it is due to become law very soon. In short, it is a highly complex and significant change (i.e. taxing what the employee might have received rather than what they actually receive), for what might be very expensive to administer and police, and of course a resultant loss of flexibility for the employer/employee.

We think the new arrangements will most commonly affect in-house benefits, accommodation benefits, and ‘company car or cash’ schemes (if provided optionally). For example, if the employee elects for an efficient and clean company car (as opposed to taking a cash allowance so they can buy their own gas guzzler), they will be caught within the new rules unless the car’s CO₂ rating is 75g/km or less!

Following the 2016 Autumn Statement it was announced that some of the changes are to be phased in; there will be no alteration to the treatment of existing employee agreements on company cars, living accommodation, or school fees benefits, until April 2021, and for other existing benefits, until April 2018.

Whilst there may be a temptation to think that ‘nothing needs to be done’ until these later dates are reached, this is certainly not the case. This transitional ‘grandfathering’ will only apply if arrangements have been definitively entered into with each employee, by 5 April 2017. Also HMRC has said that subsequent contractual changes, renewal (including auto renewal) or modification (i.e. made after 5 April) will have the effect of cancelling any such transitional exceptions. Given there are many ways in which a contract can be updated or amended (some involving specific employee elections or employer confirmations, others being undertaken on a one-off basis and some periodically), it will be vital that any new contracts or contractual changes, both before and after 5 April, are considered and implemented effectively.

Whilst some changes may be needed, we don’t see this as the end of ‘flexible benefits’ as a concept. We believe that a quite a lot of existing flexible remuneration policies may be retained, well within both the letter and the spirit of the new law. However, more than ever before, careful drafting of employer policies and employee agreements will be essential.

There will be new ‘IR35’ rules to consider from 6 April 2017, where individuals provide their personal services to a Public Authority client via their own Personal Service Company (PSC). The planned changes apply for all payments made on or after 6 April 2017, whether or not the service etc was provided before that date.

The new obligations may be summarised as follows:

–           Firstly it is essential to decide whether the contract falls within the new rules, i.e. is the contractor supplying their services to a Public Authority client, as opposed to someone else (not always easy to tell, especially if there is a chain of contracts), and are they providing a personal service in doing so? NB: the stated definition of a Public Authority body is one which is required to respond to ‘Freedom of Information’ requests, but many smaller or subsidiary bodies are not actually sure if this applies to them.

–           If so, then the Public Authority client must make a decision whether or not ‘IR35’ applies i.e. would the worker be their own employee if none of the other ‘intermediary’ structures existed in the engagement chain?

–           If IR35 applies, the Public Authority must either withhold PAYE/NIC in full (accounting for this under RTI) or inform anyone else paying the PSC, in order that the payer may itself observe that obligation (the latter may apply if payments are routed through an employment business or agency to the PSC).

In making decisions on IR35 matters, HMRC expects the Public Authority to be able to rely on its new online digital status tool (which seems highly optimistic given that the tool was only made public by HMRC on 2 March, and there have been many signs in the ‘beta testing’ phase that the tool lacks robustness ). Whilst this digital HMRC tool may ultimately prove to be a useful guide, the distinction between employed and self-employed status remains a non-statutory test, so an effective working knowledge of employment case law is likely to be required.

This in itself assumes that the Public Authority will know enough about how the contract operates in order to make these decisions. Whilst HMRC insists that the IR35 rules are not being tightened fundamentally, all those in the contractual chain will need to have an operational understanding on these new procedures, as well as effective exchanges of information, to avoid PAYE/NIC simply having to be operated ‘by default’. This would inevitably cause upward pressures on the costs of the contract, if only for the fact that employer’s NIC would be due from the payer.

The most recent HMRC guidance also says that if the worker does not provide their services via a PSC, then the new rules don’t apply. Perhaps misleadingly, this guidance omits to say that more onerous obligations apply if the payer is a non-compliant Managed Service Company (MSC). In practice it may be very difficult to distinguish between a PSC, a compliant ‘umbrella’ payroll, and a non-compliant MSC, so specialist advice may be needed in cases of doubt.

Can you spot the difference between a Managed Service Company (MSC) and a Personal Service Company (PSC)? If not, you may be subject to not only reputational, but also financial risks.

We suspect many hirers of labour feel little incentive to try to understand how their temporary workers (if engaged through an ‘agency’) are actually paid, or how any contractors’ business operates. However, when undertaking Employer Compliance Reviews (sometimes using the euphemism of ‘Know Your Customer’) we do now see HMRC expecting the hirer or ‘Client’ to take an active role in policing the arrangements. A recent Tax Tribunal decision has also now brought this matter into sharper focus.

In fact it can be very difficult to identify the difference between a legitimate intermediary e.g. an employment agency which makes payment to contractors via different (authentic) routes including PSCs, and the riskier type of operation which perhaps offers the contractor an off the shelf ‘complete payment solution’ albeit where the worker is also paid by ‘their own’ limited company.

If the contractor trades through a PSC, they can expect to be subject to the IR35 considerations. In short the IR35 rules say that if the worker would be an employee of the hirer but for the interposition of the PSC, then the PSC must account for PAYE/NIC on nearly all the income from that contract (NB: if they supply their services to a Public Authority client then, under new rules which apply from 6 April 2017, the Public Authority must take that IR35 decision, with tax/NIC being withheld from the PSC at source).

Whilst application of the IR35 rules appear to be in a constant state of flux, the advantage from the hirer’s perspective is that (outside of the Public Sector) these rules must be considered solely by the contractor company rather than the hirer.

MSCs on the other hand are potentially much more troublesome. They tend to be run by organisations and individuals who are not risking significant capital; hence these businesses can be ‘folded’ in the event of any significant HMRC enquiries (and they often are). If this happens, MSC rules indicate that any unpaid PAYE/ NIC duties may then be transferred further ‘up the supply chain’ to any other person or business who has encouraged or been actively involved in the MSC arrangements. Thus any attempt by the hirer to ‘shoehorn’ workers through a particular agency etc engagement route (perhaps based on a lower cost margin charged by that agency etc) could be seen as ‘encouragement’, and if so this becomes a PAYE/NIC risk for the hirer.

Although the MSC rules were introduced to significant fanfare back in 2007, little has been heard of these since, so there may be a temptation to think that the legislation has been forgotten about. However a recently published Tax Tribunal decision (involving Christianuyi Limited and others v HMRC, TC05045) indicates that HMRC is indeed taking a more robust approach. The case has only proceeded to the First Tier Tribunal and therefore does not yet constitute legal precedent, however it gives a good indication of how HMRC is likely to perceive the difference between a compliant and a non-compliant business.

We can therefore expect to see some further publicity from HMRC over the coming months, as they seek to gain traction from this (perhaps belated) Tribunal success. As a first step, on 7 November 2016 HMRC issued some guidance entitled ‘Use of Labour Providers‘. This was HMRC’s suggestion of a ‘due diligence’ approach which end-users or hirers of workers’ services ought to adopt. This guidance included reference to various statutory obligations, mixed in with a number of ‘recommendations’ (the latter may reflect ‘best practice’ in HMRC’s eyes, but these are non-statutory and may not always be achieved by the hirer, realistically). Nonetheless the document is an accurate reflection of HMRC’s intention to challenge non-compliant payment arrangements, including those offered by some Managed Service providers.

So what do you need to do? If the end-user client makes payment via a reputable employment business or agency, then the agency is likely to be first in the firing line (i.e. because the it is the agency rather than the end-user client which will then decide whether to engage with any ‘MSC’). However the business which hires the worker should also be aware of the distinctions. Often there will be several contractual layers in the engagement chain, and it is difficult to know how temporary workers are actually being paid. At the very least the hirer or Client will not wish to be tainted by association, with potentially negative publicity and reputational damage if it were to appear that they have (at best) acquiesced to large numbers of their workers being paid via non-compliant methods.

For any organisation seeking to persuade HMRC that the MSC legislation is not in point, it would be very useful to be able to show that any ‘PSC’ maintains full control of its own company bank account. This would include paying its own VAT and Corporation Tax bills as they become due, rather than a third party merely deducting these sums as a percentage of total contractual income. The PSC should also take personalised decisions on how each director and/or shareholder is to be paid or rewarded (rather than following a prescribed ‘off the shelf’ payment methodology).

Engaging a third party adviser to help with the mechanics of running a PSC should not be a problem so long as bespoke advice is given and the adviser’s fees are not set as a regular proportion of the income from the contract.

If you would like any assistance in this complex area please of course contact us.