You can be forgiven for having forgotten all about the new Off-Payroll Rules given the many other challenges businesses have faced over the last 7 months thanks to the Covid-19 pandemic. Many industries reliant on self-employed consultants such as finance, construction and IT, breathed a collective sigh of relief in March this year when the Chancellor announced that the new off-payroll rules would be postponed. This was felt particularly keenly by Employment Businesses, many of whom were being squeezed in the middle by pressure from clients at one end, and candidates at the other. Barry Stanton, Partner and Katie Harris, Associate - Solicitor, discuss Off-Payroll Rules coming back on to the business agenda.
Unfortunately, that relief will feel short lived as the Off-Payroll Rules appear set to come into force on 6 April 2021, with no sign of any reprieve. This has been confirmed by recent amendments to relevant sections in HMRC’s ‘Employment Status Manual’ which include, tellingly, removal of the words ‘draft and may be subject to change’.
Other changes include some helpful clarification and further guidance in relation to key areas such as:-
- Confirmation that a consultant has the right to request confirmation of whether the end client is a small, medium or large company within the meaning of the rules, and a template for businesses to use in response;
- Confirmation that the new rules apply where both the payment and the services relate to the period after 6 April 2021;
- Reassurance that HMRC will only look at historic information, including Status Determination Statements produced from last year, if these are either offered up voluntarily or there is reason to suspect fraud or criminal activity;
- Further guidance, including examples, on making PAYE deductions from payments to the consultant’s PSC including those made through a labour supply chain where one exists;
- New wording stating that where an end client issues a Check Employment Status for Tax (‘CEST’) output as a Status Determination Statement (‘SDS’), HMRC will deem this to mean that the client agrees with the CEST output and will treat its conclusion as the client’s conclusion. This means the end client can’t rely on a CEST output to discharge its obligation to make an SDS if it has failed to take reasonable care in using CEST, for instance by inputting inaccurate or misleading information; and
- A new page dealing with the interaction between the Off-Payroll Rules and the Construction Industry Scheme (‘CIS’) confirming that the Off-Payroll Rules take precedence.
So what should your organisation be doing now?
Many businesses will already have taken steps to prepare for the introduction of the new rules last year. However, one of the key aspects of the rules is that an SDS is not a ‘once in a contract’ requirement – it must be reviewed and repeated periodically throughout the life of an engagement to ensure it remains relevant. Failure to do this could indicate a lack of ‘reasonable care’ resulting in PAYE liability remaining with the end client, regardless of whether or not PAYE has already been deducted further down the chain.
Further, business need and labour supply chains are likely to have changed as a consequence of the pandemic. As a result, what may have applied last year may not still be the case by April 2021. Therefore all businesses, regardless of how well prepared they may have been, will need to revisit their arrangements and consider them afresh. Steps should include:-
- Considering whether, immediately before 6 April 2021, your business (or client) qualifies as a medium or large company (and possibly the group within which it sits) and is therefore caught by the rules;
- Auditing your current labour supply and identifying those consultants engaged via personal service companies;
- Reviewing the contractual and practical arrangements for each contractor and undertaking an SDS – even if you have already done so. This must be done before the first pay date after 6 April 2021, and on a case by case basis. It is important to remember that the way the contract is performed in practice is as important, if not more so, than the contractual terms you have in place. Further, how the consultant runs his or her business outside of the contractual arrangement is also highly relevant, so businesses will need to undertake an information gathering exercise in relation to the practices of each consultant;
- If using agencies, conduct a due diligence exercise on their business practices and credibility – the Off-Payroll rules provide that the client can be asked to account for PAYE in circumstances where a business further down the chain is unable to pay so it is important to know who you are contracting with;
- Check commercial terms and ensure these are consistent throughout the chain. This is particularly the case for Employment Businesses:- a) Do the terms between agencies in the chain reflect the ultimate contract with the consultant? It is no good, for example, relying on a consultant’s right to substitute as an indicator that they are outside the new rules if, at the end of the chain, the contract between the agency and the end client requires their personal service. b) Are there adequate contractual safeguards in place to deal with the flow of information up and down the chain, and to ensure, as far as possible, the information is accurate?
- Consider your internal processes – who will have ultimate responsibility for making and reviewing SDSs, and dealing with the client lead disagreement process? Will this be HR? If you are an Employment Business – does this give you an opportunity to add value by undertaking SDSs for your clients?
- Implement training – undertaking an SDS with ‘reasonable care’ requires an understanding of the relevant legal test for employment status, and how to apply this to real world facts. This is a highly complex and ever changing area of law. Failure to take reasonable care could result in substantial PAYE liabilities and penalties. This is particularly important as the CEST is only as good as the information put into it and can be unreliable.
- Consider what to do with consultants falling ‘inside’ the new rules. Should you move them onto an employment contract? Could you restructure their working practices so that they fall ‘outside’ the new rules? This will depend on the commercial circumstances of your business. If you are an Employment Business, you will need to consider the potential knock-on effect of other legal obligations under the Conduct Rules and Agency Regulations.
Boyes Turner is currently assisting a number of Employment Businesses and organisations from all sectors with advice on the Off-Payroll Rules. Our services include:
- Drafting consultancy agreements;undertaking SDS or the provision of a template SDS;
- Staff training on SDS and Off-Payroll Compliance;
- Review and advice on consultancy arrangements to determine whether the new rules apply, and what commercial and legal options are available; and
- Review and advice on commercial terms between different entities in the chain to ensure adequate protections are in place.
For further information, or to discuss your specific circumstances, please contact Katie Harris or Barry Stanton in the Employment Group on 0118 9527284 or via our website
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Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.