The government announced in the recent mini Budget that it intended to scrap the off payroll working rules from 6 April 2023. On 17 October 2022, it confirmed that this is no longer the case. This means that the rules, which apply when a business engages a contractor who operates through a personal service company (PSC), will continue past April next year.
The off payroll working rules, often referred to as IR35, were changed for the public sector in 2017, when liability for determining the tax position fell to the entity engaging the consultant. After several false starts, these changes also came into effect for the private sector from April 2021.
The rules provide that, where a consultant provides services through a PSC that passes the gateway test, the end user will be responsible for determining the deemed employment status of the consultant for tax purposes before the engagement commences. This is achieved by the carrying out a status determination assessment (SDA).
To assist businesses, the government introduced its own SDA, known as ‘check employment status for tax’ (CEST). A written copy of the results must be provided to the PSC. If the SDA confirms that the consultant has deemed employment status, the fee payer will be responsible for paying the tax and National Insurance contributions.
The government stated in the mini Budget that the rationale for its original proposal to scrap the rules was to reduce the complication of administering tax for business. It is certainly the case that transferring responsibility for determining a consultant’s tax position has added an additional layer of administration for business, and many organisations have revised their engagement and payroll processes to ensure compliance, which has taken significant time and investment.
There is also concern regarding the certainty of the CEST tool itself. Particularly, that the questions can be difficult to answer with conviction and some results have been found to be incompatible with recent tribunal decisions, especially with regard to the mutuality of obligation test. The results often come back as inconclusive, which means that despite government assurance on its website that it will stand by determinations given by the tool, so long as the information remains accurate, the user still on occasion has to make a judgement call even after applying the CEST test.
This can often result in a contractor being put through payroll where their status cannot not be clarified with absolute certainty, and the end user takes a risk averse approach in order to avoid future action by HMRC, even where the parties do not necessarily agree that the test for deemed employment status has been met.
The government’s decision not to repeal the rules has therefore come as a big blow for businesses who were looking forward to no longer navigating through this process each time they engage contractors via a PSC. Unfortunately, given the continuation of the rules, these issues are likely to continue to challenge organisations that engage consultants in this way.
Businesses should continue to apply the off payroll working rules. Any organisation that is still not confident about the applicability of the rules should seek expert advice. This is important because a business that is not compliant will be at risk of negative audit from HMRC.
Organisations should also remember that the concept of deemed employment status for tax purposes is irrelevant to the consideration of an individual’s status for employment law purposes. Confusingly, this means a person could have deemed employment status for tax purposes, but not be classed as a worker under employment law, or vice versa.
Jayne Flint is an associate in the employment team at law firm Womble Bond Dickinson