We now have sight of the draft Finance Bill 2019/20, containing the long awaited draft legislation for off-payroll working in the private sector - rules that are set to come into force on 6 April 2020. 

This follows the recent consultation process which has probably been one of the mostly hotly debated tax consultations in recent times. To recap, this is legislation which transfers the responsibility of checking whether contractors need to have income tax and National Insurance contributions deductions taken, from the contractor to the organisation using their services.

Until this point, tax professionals and businesses have had to speculate how these significant changes will be implemented as well as the effect it will have on each person in the supply chain, where a contractor is hired through a personal service company.

Well, we need speculate no more. The wait is over and the guidance contains no surprises.

What are the key take-aways?

The first point to mention is that the draft legislation did not contain any surprises from the general thrust of the proposals within the recent consultation, so in a way we have been somewhat prepared.

But let’s be clear. This new legislation is far from straight forward and we anticipate that the complexities within the law will cause many businesses, their advisers and HMRC itself more than a few problems in applying the law in practice. A good example of this is how the legislation is dealing with the exemption for applying the new law for small businesses. Four and a half pages of the eleven pages in total are devoted to how the small company exemption is to apply.

The legislation confirmed the following key features, all of which we did anticipate:

• As mentioned, an exemption for small companies in line with the definition of a small company under the Companies Act with some tweaks for non-corporate bodies and a raft of anti-avoidance measures for group companies.
• A statutory requirement for the end user of personal service company contractors (termed as “the client”) to decide on employment status and to produce a Status Determination Statement to the contractor and the party the client immediately contracts with
• The fee-payer, i.e. the last party in the contractual chain before the contractor’s Personal Service Company, is responsible for deducting PAYE and NIC where due
• A “client led” disagreement process providing statutory measures to force clients to reassess the employment status of the contractor within a 45 day period if the contractor disputes this
• Provisions for HMRC to collect any PAYE/NIC due from anywhere within the supply chain if the responsible party fails to do so for whatever reason
• Confirmation that IR35 takes priority over the Construction Industry Scheme which may impact a high number of labour-only subcontractors in the property and construction sector.

Understanding your obligations

The key observation we have from our initial grasp of the legislation is that end users (“clients”) will have the most to contend with under the new legislation and will have to be on their toes to avoid being penalised for system or process failings. Rather than enforcing compliance through financial penalties, which we have all become accustomed to in tax law in general, the Government has decided instead to penalise clients who fail to play by the rules by bouncing back all responsibilities and liabilities under the new laws back on to the client regardless of whether this would ordinarily sit with another party in the chain. For example, failure to respond to a dispute within 45 days, failing to notify a contractor that the client now qualifies as a small company and failure to provide a Status Determination Statement can all result in the client having to assume the PAYE/NIC responsibility as a penalty. The logic, we believe, behind this is to encourage clients to take this law seriously and to self-police the rules.

Preparing for change

Clients will have a big challenge on their hands over the next eight or so months preparing for these changes so they can ensure compliance from day one. There is a common concern that many “clients” will force all contractors on to the payroll under PAYE/NIC by default as a way of managing the risk of making mistakes as well as for ease. We do not necessarily believe that this is the right approach to take even if it is understandable in some cases.

We are sure there will be more to follow on this over the months ahead, especially as not all the details and inconsistencies have been addressed with this first draft of the legislation, but there are some steps you can take now to prepare for this change.

Get in touch

The Employer Services team at Johnston Carmichael are on hand. We can help you to navigate through the complex rules and put a plan in place in preparation for these rules in April next year. Get in touch with me at: brian.rudkin@jcca.co.uk for an initial chat.