Do you engage individuals to provide services and contract with them via an intermediary? You might think of them as freelancers, contractors or consultants. If so, you need to be aware that from 6 April 2020, the tax rules are changing to widen the application of existing anti-avoidance rules to the private sector.
Employee or 'contractor'?
The rules aim to stop individuals from avoiding employment taxes where they are performing the role of an employee. Historically, individuals were able to contract with an end user via an intermediary, and, by claiming that they were self-employed, they avoided the 13.8% employer's national insurance contributions (NICs). Since 2000, regulations have imposed the employer's national insurance obligations on the intermediary, so the intermediary essentially acts as the employer and bears the PAYE and NICs burden.
The rules are complex, particularly when applied to multiple intermediaries in a chain of contracts, and have been burdensome and expensive for industry to comply with. HMRC perceives there to be a 'compliance gap' and so has sought to move the burden of complying with the rules from the intermediary to the end client. The public sector experienced this change first in 2017, and next April's change brings the private sector into line with the public sector.
From 6 April 2020, end users will need to determine whether these rules apply and will not be able to depend on a contractor's intermediary getting it right. If your contractors are deemed to be 'employees' under these rules, you will need to operate the PAYE system for those individuals, and will have a liability to account for employer NICs. If you take the time to consider the new rules and your own structures now, you should be in a good position to cope when the new rules come into force.
The change next April means that if you are an end user, you will be responsible for providing your contractors with a 'status determination statement' outlining the reasons for your decision on their tax status. If contractors disagree with the determination, they will have the right to provide representations to you as to why they think your determination is incorrect. You will then be required to respond to those representations within 45 days by either providing a new statement or upholding the conclusions in the originally issued statement.
The consequences of failing to take reasonable care to reach a determination or failing to respond to the appeal within 45 days are significant given that if such a finding is made, any payroll liability will sit with you rather than the contractor. This is the case even where it would originally have sat with the agency between the end user and the contractor. This means that a blanket approach to determinations is high risk.
What if a status determination is challenged?
The draft legislation does not currently outline a procedure for situations in which a contractor continues to disagree with the end user's determination. This means that there is still a degree of uncertainty as to the potential legal consequences of a conflict over a status determination statement. Contractors could respond by challenging HMRC and pursuing the matter in the First-tier Tax Tribunal, seeking to enforce their employment rights in the Employment Tribunal or refusing to complete the contract and thereby seeking to trigger contractual litigation. There are many stories of unhappy contractors in the public sector who simply walked off their projects when the 2017 changes took effect, so this issue needs careful handling in order to protect business continuity.
Combatting allegations of tax evasion
You should also be aware that under the Criminal Finances Act 2017, corporations and partnerships can be held criminally liable if they fail to prevent their employees, agents, or others who provide services on their behalf from criminally facilitating tax evasion. This should be rare, but could happen where:
a worker is knowingly concerned in, or is taking steps with a view to, the fraudulent evasion of tax; and
your representative knowingly assists such evasion – perhaps by 'turning a blind eye' or even taking positive steps to help a dishonest worker. In this case, your organisation would also be committing an offence of 'facilitation', liable to criminal prosecution as there is no requirement for intent on the part of the corporate to be established, nor does there need to be any benefit for the corporate.
Arguably, this could extend to situations where an end user has not asked questions of a worker (on the basis that the end user could 'save' on employer's NICs) or even directed a worker towards presenting itself as self-employed.
The only defence available to an end user is that it had "reasonable prevention procedures" in place to attempt to prevent any such facilitation from taking place; for example, through staff training and a robust written policy.
The government's response to its public consultation on these rules, together with draft legislation, was published in July 2019. The government has confirmed that, despite industry calls for a delay in bringing in the new rules, the changes will take effect in April 2020. We are still waiting for draft guidance to be published.
While we wait for the final details to be confirmed, now is a good time to start thinking about the way you engage individuals and perhaps to start reviewing contracts so that you are in the best place to react when the results of the consultation and draft legislation are published.
Wider engagement within business
The new rules require the engagement of the Human Resources, Finance, Tax, Legal and Management teams of any business to get right. If you take a holistic and proactive approach to the new rules, you should be well placed to handle their far-reaching implications.
Our Corporate Tax, Tax Dispute Resolution and Employment teams have significant experience in this area and can work with your business to review its current engagements, ensure that it has sufficient procedures in place to prepare for the upcoming changes and to respond to any challenges it faces following the rules' introduction.