Anyone engaging someone through a personal service company (“PSC”) or operating through a PSC should be aware that from 6 April 2020 there will be two parallel systems for applying the IR35 rules depending on whether the engager (the end client) of the contract worker is
- a public sector body, or medium or large organisation in the private sector; or
- a small private sector organisation.
In the first case the engager will need to make the employment status determination to assess whether tax and NI deductions should be made as if the worker was an employee. In the second case the worker’s PSC will make that decision as at present.
The engager will be in the second category if it meets two of the following three conditions for the financial period ending in the previous tax year:
- an annual turnover of less than £10.2m
- a balance sheet total of less than £5.1m
- no more than 50 employees
Whilst these criteria are based on the Companies Act definition of a small company they also apply for this purpose to all engagers. It is not clear how the contractor will know which category their customer (the engager) falls into, other than whether or not they receive an employment status determination.
If the engager is in the first category they must:
- decide the employment status of a worker for every contract agreed with an agency or worker
- pass that determination and the reasons for the decision to the worker and to the agency it contracts with
- keep detailed records of all employment status determinations, including the reasons for the determination and the fees paid
- have processes in place to deal with any disputes that arise from the determination
It is also clear that the engager must make the employment status determination on or before the date the contract is entered into. The contractor has a right of appeal against the determination.
The engager must take reasonable care when making the determination, but the HMRC guidance does not advise the engager what evidence it needs to take into account when making that determination. In practice, HMRC will expect the engager to use the check employment status for tax (CEST) tool to reach a decision on employment status. But the CEST has been criticised by the professional accounting and tax bodies and contractor groups for ignoring key elements of the employment status tests as established by case law. HMRC says it will be updating the CEST in time for implementation of the revised off-payroll rules.
WatkinsonBlack have considerable experience in all areas of taxation and business services, including providing a very cost-effective payroll bureau service. If you want to arrange a no-obligation initial meeting on any taxation or accounting matter then please contact us. Please note that these ideas are intended to inform rather than advise and you should always obtain professional advice before taking any action.