EMPLOYMENT STATUS - 15.03.2018

What’s next for status?

Background

Since the publication of the now infamous IR35 press release by Chancellor Gordon Brown, successive governments have been fighting to stem the tide of non-traditional ways of working, from the ubiquitous term “self-employed” to the rise of zero-hours contracts and the common parlance of the “gig economy”. But in the last few years the pace has quickened on a number of fronts. The millennial generation want the flexibility and work-life balance of the gig economy but are less happy when they realise that can mean giving up valuable rights such as holiday pay and workplace pensions. For the government it’s all about the loss of that valuable 13.8% of employers’ NI which, for one group in so-called disguised employment, was estimated to cost the Treasury £440m in 2016/17.

Which payees are a problem?

The answer is all of them if you don’t take the assessment of employment status seriously. There is a risk for the hirer of labour if anyone they are doing business with is not paid through PAYE as a worker or an employee. That’s not to say there is no longer any concept of being self-employed, just the absolute requirement to be certain that is the appropriate payment model based on the way that the contract is carried out, not just how a contract or verbal agreement describes the arrangement. The courts and HMRC will always look behind the intention of the two parties to the actual way the engagement is carried out in practice.

Does it matter if you get it wrong?

As the hirer, you’ll be on the hook for the unpaid tax and NI, plus penalties and interest, if you’ve failed to operate PAYE by paying the individual gross via an invoice. If HMRC goes back six years if you’ve had a long-term relationship with someone who you treated as self-employed and that is overturned, the cost can easily run into six figures. You’d also be liable for the apprenticeship levy on anything deemed to be subject to employers’ NI if you’re liable to the levy since its introduction in April 2017.

Even limited companies are a risk now

If you’ve been following the news recently you’ll have seen that an ex-BBC presenter faces a tax bill of over £420,000 for being allowed to invoice through her limited company when her contractual arrangements were no different to colleagues who were on the payroll; she even received a clothing allowance and a bonus paid on improved ratings that she was allowed to invoice for. It had been commonplace in recent years to work with contractors who had set themselves up as limited companies as it removed any status risk from the hirer, as the limited company had to assess if the contract and the fees were caught by IR35 and treat that in their own accounts as income subject to PAYE. Many contractors of course took the view that their contracts were not caught by IR35 and HMRC had insufficient resources to challenge this. IR35 basically says if you strip away the limited company, would the contract have all the hallmarks of employment? Coupled with the attractiveness of taking most of the income from the limited company as a dividend rather than salary (until dividend tax increased in the last few years) it is no wonder that HMRC estimated that in the public sector alone there were 26,000 individuals working through limited companies that ought to be declaring their income as liable to tax and NI.

Deemed workers

Deciding that the loss of employers’ NI from the growth of limited companies was no longer sustainable, from 6 April 2017 the government decided to revert to how IR35 was first envisaged to work in 2000: the hirer would assess status and if the arrangement would have been one of employment if it weren’t for the limited company’s existence, the hirer would be required to withhold tax and NI from the limited company’s invoice. Currently though, the rules only apply to engagements in the public sector where arguably it was very embarrassing that contracts were being constructed to avoid the public purse receiving the appropriate amount of employers’ NI.

Deemed worker. Wherever the status assessment was “employment if it weren’t for the limited company” the director of the limited company would now be classed as a deemed worker for the hirer. Until 6 April 2017 there had only been:

• employees subject to PAYE/NI and with all employment rights
• workers subject to tax and NI but with no employment rights
• those in business on their own account operating as sole traders, limited companies or partnerships and paid gross.

So how does this withholding work?

As ever with new legislation, the complexity is in the execution. HMRC’s view was that it would be easy to turn a limited company into an individual who could be added to a payroll system allowing their fees to be become a salary that could be subject to tax and NI. To do this successfully requires:

• the finance team receiving the invoice from the limited company, extracting the fees from the invoice, ignoring VAT and qualifying expenses
• passing that amount, plus the director’s personal details to the payroll team or agent
• the payroll team/agent setting up the director in a dedicated cost centre to keep the liabilities separate from the employees, allocating a tax code and NI table letter to the record and insert the fees from the invoice as the “salary”
• including the deemed worker in the gross to net, sending their information in the FPS and paying the withheld tax and NI to HMRC along with the employees’ liabilities on the 22^nd
• finance informing the limited company how much has been withheld from the invoice and paying over the balance.

So, who can still be paid gross?

In the private sector limited companies can still be paid gross and assess if their contracts are caught by IR35 when they prepare their accounts. Sole traders and partnerships can be paid gross if you are certain that the contractual arrangement can be defended as a contract for service (self-employed) not a contract of service (employment).

It’s a criminal offence to get it wrong

To make matters worse, since 30 September 2017, a business, LLP or partnership can commit a criminal offence if it allows any of its employees, contractors or subcontractors operating under its instructions to facilitate tax evasion. Failing to assess status that leads to a loss of tax and NI would be such an offence.

Pro advice. Be sure to put in place reasonable prevention procedures. They will act as your defence if you are accused of the new offence.

Help from HMRC

So if employment status is now so crucial, how can employers defend themselves? By using the check employment status for tax tool, see Follow up. The online tool was developed by HMRC for the 2017/18 tax year to help public sector employers to assess if any of the off-payroll workers they had engaged were to be treated as deemed workers from 6 April 2017.

Private sector next?

HMRC announced at Budget 2017 that it would be consulting on the success of the deemed worker rules in the public sector to see whether an extension to the private sector is appropriate. Many commentators think that this is a given as it is untenable to have limited companies allowed to be paid gross for contracts in the private sector and with a tax and NI withholding in the public sector.

Pro advice. Consider what practical difficulties you would face adapting your processes for handling employees to accommodate deemed workers.

A link to HMRC’s status tool