The previous Chancellor announced in the recent mini-Budget that the Government was intending to scrap the Off-Payroll Working rules from 6 April 2023. On 17 October 2022 however the Government confirmed that this is no longer the case.
This means that the Off-Payroll Working rules, which apply when a business engages a contractor who operates through a Personal Service Company, will continue past April next year.
What are the Off-Payroll Working rules?
The Off-Payroll Working Rules, often referred to as “IR35” (the Rules), were changed for the public sector in 2017, when liability for determining the tax position fell to the entity engaging the consultant (known as the “End User”). After several false starts these changes also came into effect for the private sector from April 2021.
The Rules provide that where a consultant provides services through a personal service company (PSC) which passes the “gateway test”, the End User will be responsible for determining the deemed employment status of the consultant for tax purposes before the engagement commences.
This is achieved by the End User carrying out a Status Determination Assessment (SDA). To assist business, the Government introduced its own SDA known as “CEST” (Check Employment Status for Tax). A written copy of the results must be provided to the PSC.
If the SDA confirms that the consultant has deemed employment status, the fee payer (which is usually the End User) will be responsible for paying the tax and National Insurance contributions.
The implications for business of retaining the Rules
The Government stated in the mini-budget that the rationale for its original proposal to scrap the Rules was to try and reduce the complication of administering tax for business.
It is certainly the case that transferring responsibility for determining a consultant’s tax position has added an additional layer of administration for business; and many organisations have revised their engagement and payroll processes to ensure compliance which has taken significant time and investment.
There is also concern regarding the certainty of the CEST tool itself. Particularly, that the questions can be difficult to answer with conviction and some results have been found to be incompatible with recent tribunal decisions, especially with regard to the mutuality of obligation test.
The results often come back as “inconclusive” which means that despite Government assurance on its website that it will “stand by determinations given by the tool, so long as the information remains accurate” the user still on occasion has to make a judgement call even after applying the CEST test.
This can often result in a contractor being put through payroll where their status cannot not be clarified with absolute certainly, and the End User (understandably) takes a risk averse approach in order to avoid future action by HMRC, even where the parties do not necessarily agree that the test for deemed employment status has been met.
The Government’s decision not to repeal the Rules has therefore come as a big blow for businesses who were, no doubt, looking forward to no longer navigating through this process each time they engage contractors via a PSC.
Unfortunately, however, given the continuation of the Rules these issues are likely to continue to challenge organisations that engage consultants in this way.
What next?
Businesses should continue to apply the Off-Payroll working rules. Any organisation that is still not confident about the applicability of the Rules to them should seek expert advice. This is important because a business that is not compliant will be at risk of negative audit from HMRC.
Organisations should also remember that the concept of deemed employment status for tax purposes is irrelevant to the consideration of an individual’s status for employment law purposes. Confusingly, this means a person could be deemed to have deemed employment status for tax purposes but not be classed as a worker under employment law, or vice versa.
If an employment tribunal considers that a person is a worker and not a self-employed contractor, that person will be afforded protection as either a worker or an employee (depending on their status). This may include, for example, the right to take paid holidays, to claim unfair dismissal and other rights under the Working Time Regulations, which can be costly to business, as recent cases such as Pimlico Plumbers v Smith (2018) and Uber v Aslam and others (2021) have illustrated.
Liz Truss promised to review the Rules if she became Prime Minister so future changes to the Rules still cannot be ruled out.
This provides summary information and comment on the subject areas covered. Where employment tribunal and appellate court cases are reported, the information does not set out all of the facts, the legal arguments presented and the judgments made in every aspect of the case. Employment law is subject to constant change either by statute or by interpretation by the courts. While every care has been taken in compiling this information, we cannot be held responsible for any errors or omissions. Specialist legal advice must be taken on any legal issues that may arise before embarking upon any formal course of action.
