From 6 April 2020, employers engaging contractors through personal service companies (PSCs) will be responsible for determining whether the contractor should be treated as an employee for tax purposes. Today the government published responses to their recent consultation and the draft legislation for the changes.
Today provided no shocks, but some clarity:
Determinations will need to be communicated (with reasons)
A number of businesses suggested they might want to take a blanket approach to the new rules. Under the draft legislation this doesn't look possible and is likely to significantly increase the administrative burden for these businesses.
In addition to a requirement to take "reasonable care" in making their determinations, businesses will also need to communicate both the determination itself and their reasons for making the determination.
There will be no official dispute resolution channel
HMRC will not provide an arbitration or dispute resolution service - it is up to the business both to determine the contractor's employment status for tax purposes and to resolve any disputes. Businesses will need to respond to any dispute within 45 days.
The government believes that businesses are best placed to "understand contractual terms and expected work practices of those it chooses to engage, and to respond to any concerns or disagreements in real time".
We expect this to be a challenging area for businesses, and hope that updates to HMRC's tool for checking employment status for tax (CEST) come in good time to ease the burden on employers in making their determination, and assist with explanations to contractors unhappy with their employment status. HMRC have advised that they will provide support and guidance, although we await further details on the exact nature of this.
Clarity on the definition of 'medium' and 'large' companies
The government confirmed the position that only medium or large companies would be affected by the new rules, i.e. those that meet at least two of the following criteria:
1. annual Turnover of £10.2m or more;
2. a balance sheet total of £5.1m or more;
3. more than 50 employees.
This is a welcome clarification, in line with expectations and with the majority of responses to the consultation.
The HMRC Check Employment Status for Tax (CEST) tool will be updated
The government confirmed that HMRC CEST tool will be updated prior to the reform - with a new version "available for use later in 2019".
The current version of the tool is widely criticised as it assumes that a contract automatically gives rise to a mutuality of obligation. This seems to be the default position of HMRC, but is contrary to the judgments expressed in recent case law.
The consultation paper advised that HMRC "have conducted over 25 CEST user research sessions and continues to work with a wide range of stakeholders on its enhancements to the service". We welcome the updates to the tool, but it is disappointing that HMRC have missed the opportunity to release an updated version to provide clarity earlier, with businesses having to make assessments for all contracts that will run beyond 5 April 2020.
So what next for businesses?
With less than nine months until the rule changes are in force, our advice to businesses is to take action now, following the steps discussed here.
This measure introduces changes to the operation of the off-payroll working rules from April 2020, these rules are designed to ensure fairness between individuals working in a similar way.