Determining off-payroll employment status

The off-payroll working rules for private businesses are set to change from April 2020, but some recent tribunal decisions have led to uncertainty over determining employment status.

The rules, commonly known as IR35, apply where a worker provides services to a client or end-user through an intermediary – typically a personal service company (PSC) owned by the worker. At present, if the end-user is in the public sector, they must determine the worker’s employment status. If the end-user is in the private sector, it is the responsibility of the PSC.

From April 2020 private sector medium and large businesses that engage workers via intermediaries will have to determine their employment status. There will be no change for small businesses.

Status determination
Medium and large end-users will have to issue an employment status determination statement (SDS) and explain the reasons for it. If there is an employment agency or other intermediaries in the supply chain, the end-user should pass the SDS down the line until it reaches the business that will pay the PSC. If that business decides the worker is an employee, then it is treated as the employer and must deduct income tax and employee’s NICs from the payment. It is also responsible for paying the employer’s NICs.

Up to 170,000 PSCs are expected to be affected by the change. Some may find it has far-reaching consequences. If such workers considered they were not within the IR35 rules before April 2020, but the end-user then categorises them as an employee under the same contract conditions, HMRC could impose tax penalties for previous tax years. A PSC owner in this position may wish to make an unprompted disclosure to HMRC, which would reduce or possibly avoid penalties.

A problem for PSCs and their clients is that determining employment status requires applying complex rules that even HMRC can find difficult to interpret. In a number of cases, the tax tribunal has issued conflicting decisions, depending on the precise facts, with HMRC winning some very recent ones. If you may be affected, we can advise.