Most businesses will be aware of the upcoming change in relation to individuals engaged for services via a personal services company. You can read more in one of our earlier blogs. The rule changes effective from 6 April 2020 were announced over seven months ago (and had been anticipated for some before that), but from the linked article we can see that contractors remain in the dark about what the rules mean for them.
It is hard to argue that businesses are really at fault for this. Knowing that you have a problem, and knowing how to deal with a problem, are two very different things. HMRC guidance is usually a good starting point for such challenges. Hidden away on their website, they suggest a four step approach in their guidance note "Find out how to prepare for changes to the off-payroll working rules from 6 April 2020". While the approach can't be faulted, applying these steps to your business is often not so straight forward.
We would first actually add an extra step. As a preliminary exercise, businesses need to establish whether the new rules will apply to them. The rules will apply to medium and large sized businesses only. The definition of medium and large is likely to follow the criteria set out in the Companies Act 2006, but there is some uncertainty as to how these will be applied (and these are subject to a HMRC consultation).
1. Identify the population
Identifying the population affected by these changes will be a tricky task. Companies with multiple group entities, or a private equity house with a wide portfolio, face a huge administrative task to understand the scale of the problem they face, especially given the diverse ways in which contractors are engaged through organisations making it difficult to easily obtain a complete "list" of contracts. We suggest undertaking a systematic review in conjunction with procurement or HR teams to identify the likely areas within the business that will have contractors engaged through a PSC. If the population is large, a pragmatic approach would be to first analyse a sample to understand the main areas of risk.
2. Determine if the rules apply
HMRC point us in the direction of their Check Employment Status for Tax (CEST) online tool to determine if the rules bite. The tool does come with a health warning as it has given results contrary to the decisions in recent tax tribunals, for example, the tool does not factor in concepts such as 'mutuality of obligation' and often cannot confirm whether the intermediaries legislation does or does not apply. In reality, a business' review may have to consider the facts and circumstances of individual contractors, potentially interviewing contractors or managers, and applying recent case law to the situations.
3. Talk to contractors affected by the rules
When the rules were rolled out in the public sector (from 6 April 2017), contractors had the option of moving to the private sector. Although private sector businesses do not face the same difficulty (other than a risk of losing out to 'small' companies), businesses may face challenges on talent and flexible resources, if they adopt a more conservative approach to the assessment than a competitor. Pitching the message right will be important. Prior to issuing communications, businesses will need to have decided what approach they will take for contractors they deem "caught" by the rules (e.g. whether the business will bear the extra cost, or share the burden with the contractor through the renegotiation of fees).
4. Put in place processes to manage future engagements
The final step may feel less urgent for some businesses at this stage, but they should be aware of the implications of the rules now for all new contractual arrangements which go beyond 6 April 2020. It is important that organisations ensure they can evidence a clear assessment process (perhaps using the CEST tool as a starting point or other tools on the market) through the labour supply chain, and update company policies to reflect the new rules. Taking action now is sure to save time in the event of a HMRC audit or enquiry. The increasing appetite for HMRC to use the Criminal Corporate Offence means businesses will need to demonstrate that they have put in place reasonable steps to prevent the facilitation of tax evasion.
These simple sounding steps can actually mean quite a lot of work for businesses. Given the complexities, we suggest this is something businesses focus on well in advance of 6 April 2020.