All change for the contractor industry

The government published the draft legislation on 12 July to introduce ‘off-payroll’ rules to cover most private sector businesses from April 2020.

This will bring the ‘off-payroll’ rules introduced to the public sector in 2017, flagged by high profile cases involving BBC on-air talent such as Christa Ackroyd and Lorraine Kelly as well as civil servants and NHS managers, to cover most of the private sector.

The legislation will affect over 250,000 contractors operating through a personal service company (PSC) or umbrella company predominantly in the IT, consultancy, construction and logistics industries. The new rules will also affect over 60,000 large and medium sized end client companies and over 20,000 intermediaries (recruitment agencies and umbrella companies) in a move expected to raise £1.3bn a year for the Treasury.

The legislation will transfer responsibility for evaluating the employment status of contractors from their own personal service company to the large and medium sized companies which are their end clients and to any intermediary agencies through which the contractor is engaged.

Where the end client company considers a contractor may or should be ‘inside’ the Intermediaries Legislation (usually referred to as IR35), the end client company will be required to deduct National Insurance Contributions and PAYE income tax from payments to the contractor as if the end client company was the employer. For those contractors falling within the new rules and engaged through an intermediary, the end client may transfer responsibility for deducting and accounting for NIC and PAYE to the intermediary.

The new legislation is proving highly controversial with significant concerns raised not least on the employment status determination the end clients and intermediaries will have to make for each of their contractors.

Employment status determination of contracts under IR35 has proved notoriously challenging with no clear cut guidance from tax tribunals and a significant lack of confidence in HMRC’s Check Employment Status for Tax (CEST) online tool. The determination is however important as the potential tax liabilities from an incorrect decision may be substantial for the end client or intermediary as well as for the contractor and their PSC.

Given the potential tax liabilities, it is uncertain whether end clients and intermediaries will apply a risk-averse approach to the employment status determination, such as that adopted by the BBC after 2017, or if a blanket view of all contracts held with personal service companies will be implemented. Nor is it clear how the legislation will impact on the contracting industry and the business models of the end clients to which they provide their services.

There are exemptions from the new rules for end clients and intermediaries which qualify under the Companies Act definition as “small” however all large and medium sized end client companies should plan procedures to implement the new legislation which minimises the tax risks and any adverse impact on their business processes.

For contractors the to-do list is somewhat longer requiring: a review of current contracts; engaging with end clients and intermediaries on their employment status determination procedures being adopted; and considering contract rates and terms for all future engagements.

WSM can help end users, intermediaries and contractors with advice and planning for the changes.