HMRC issue briefing: reform of off-payroll working rules
- Off-payroll working rules
- Reform to the rules
- Support from HMRC
- The check employment status for tax (CEST) tool
1. Off-payroll working rules
The off-payroll working rules can apply if a worker provides their services through an intermediary, which is usually the worker’s own personal service company (PSC).
The rules make sure that individuals working like employees, but through their own limited company, pay broadly the same tax and National Insurance contributions (NICs) as individuals who are employed directly.
To work out whether the rules apply, a person or organisation will make a decision about whether the worker is employed or self-employed for tax purposes. This is known as an ‘employment status determination’.
The proposed reforms to the rules mean that the person or organisation responsible for making this decision will change, where people are contracting their services to large or medium-sized organisations outside the public sector.
2. Reform to the rules
Before 2017, the responsibility for determining employment status for tax fell to the worker’s PSC.
In 2017, the government changed the off-payroll working rules for those working in the public sector in order to improve compliance with the existing rules. The reform shifted responsibility for determining employment status from the worker’s PSC to the organisation they work for. This is how employment status for tax is decided for the vast majority of people, who do not work through their own company.
Currently, an individual with an income of £50,000 who works through their own company, but doesn’t follow the rules, will contribute around £6,000 less (through tax, National Insurance and employer’s NICs) than somebody doing a very similar job as an employee. This includes employer NICs contributions of around £5,000.
At Budget 2018, the government announced that this change will be introduced to all other sectors from 6 April 2020, to ensure consistency and compliance across the labour market.
From this date, large and medium-sized organisations will become responsible for assessing the correct employment status of the contractors they engage to work for them. If it is determined that the rules apply, the organisation that pays the individual’s own limited company will be responsible for deducting and paying the associated employment taxes and NICs to HMRC.
HMRC estimates that, outside of the public sector, only one in 10 people who should be paying tax under the current off-payroll working rules are doing so correctly. These reforms will ensure the right amount of tax is collected. This will level the playing field between those who were applying the rules and those who were not.
This is not a new tax. These changes are intended to encourage compliance with the existing rules, and to make sure those affected pay the right tax from April 2020 onwards. This reform will provide £3 billion for essential public services, including the NHS, over the next 4 years.
This reform does not prevent people from working through their own limited companies and does not affect the self-employed. Contractors who are following the existing rules correctly will feel little impact.
HMRC have taken the decision that they will only use information resulting from these changes to open a new enquiry into earlier years if there is reason to suspect fraud or criminal behaviour.
Contractors who work for small businesses will continue to make employment status decisions for their PSCs, and we’re continuing to support them with guidance, a helpline and online tools.
3. Support from HMRC
HMRC has put various measures in place to help businesses and other organisations get the status of the contractors they engage right. We have dedicated teams providing education and support to all businesses, public bodies and charities affected.
This includes one-to-one support for 2,000 of the UK’s biggest employers and direct communications to around 15,000 medium-sized businesses. This is supported by workshops, guidance, online learning, round tables and an enhanced online tool that will help them make the right decisions.
Guidance on GOV.UK
Further guidance on the details of the reform will be published by the end of the year.
4. The check employment status for tax (CEST) tool
The CEST tool was first introduced in 2017 to help individuals and organisations decide if a worker should be treated as employed for tax purposes. It takes users through straightforward step-by-step questions.
The tool was rigorously tested against case law and settled cases by officials and external experts. It provides accurate results and HMRC will stand by the result produced by the tool provided the information input is accurate and the tool is used in accordance with our guidance.
To date, the tool has provided a determination in at least 85% of uses. As a minority of employment cases can be less straightforward, we’re giving these customers detailed help and guidance, including one-to-one support from specialist advisers on our helpline.
HMRC will launch an enhanced version of the CEST tool before the end of the year. We worked with more than 300 stakeholders to make the tool clearer, reduce user error and consider more detailed information.
Customers don’t need to wait for the enhancements to go live: HMRC stands by the results given by the tool now, provided the information entered is accurate and it is used in accordance with our guidance.