Changes to off-payroll working in the private sector

The government previously announced that from 6 April 2020 all medium and large businesses who engage "off-payroll workers" (for example contractors engaged through their personal service companies) will be responsible for determining whether, but for any intermediary agency or service company, they should be considered an employee for tax purposes. Before this, it was for the service company to make the determination (in accordance with the so-called "IR35" rules).

This change has already taken place in the public sector and this extension to the private sector will bring a consistency of approach.

A consultation launched yesterday, focusing on the practicalities of implementing this change, has prompted strong reactions from business, as noted in the linked Financial Times article. This is understandable - the change is a big shift which will place a much larger risk and administrative burden on businesses who engage contractors through an agency or service company, not to mention potential extra costs (through employer NICs and the apprenticeship levy). However, current compliance with IR35 rules is, according to HMRC, extremely low and this move was generally seen as an inevitable consequence in an effort to help close the "tax gap".

Medium and large businesses will need to start preparation now, especially as longer term contracting arrangements that are being discussed or entered into now may extend past the April 2020 implementation date. 

Immediate actions for businesses include:

• identifying risk areas throughout the labour supply chain (e.g. business areas using a high number of contractors);
• reviewing all current contractor arrangements involving agencies or service companies;
• considering changes to current protocols for engaging future contractors;
• internal consultation with the relevant stakeholders across the business, including payroll and systems team;
• budgeting for any increased costs;
• developing a consistent communication plan for current and future contractor arrangements through agencies and service companies, including consideration of any knock-on effects (for example employment contracts and employment legal rights which may be requested by contractors).