In this month’s newsletter we’re turning our attentions to two significant changes in tax law from April 2020 that employers need to be aware of. The changes relate to the:
- The rules for engaging individuals through personal service companies
- The payment of employer National Insurance Contributions (‘NICs’) on termination payments
CHANGES TO THE RULES FOR ENGAGING INDIVIDUALS THROUGH PERSONAL SERVICE COMPANIES (‘PSCS’)
From 6 April 2020 the responsibility for determining whether the off-payroll working rules (also known as IR35) apply will move to the organisation receiving an individual’s services (currently this determination is made by the personal service company itself). Any organisation that meets the definition of a medium or large organisation will be required to assume this responsibility, including third sector organisations, such as some charities.
The rules will apply to organisations that meet two or more of the following conditions:
- Have an annual turnover of more than £10.2 million
- Have a balance sheet total of more than £5.1 million
- Employ more than 50 employees
There is also a simplified test which stipulates that an organisation must apply the rules if they have an annual turnover of more than £10.2 million and are not:
- a company
- a limited liability partnership
- an unregistered company, or
- an overseas company
There are also rules which cover connected and associated companies. If the parent company of a corporate group is medium or large, their subsidiaries will also have to apply the off-payroll working rules.
Off-payroll rules will apply if the worker provided by the PSC would have been a deemed employee of the organisation receiving the individual’s services, but for the existence of the PSC. If the worker would have been a deemed employee, from 6 April 2020, the organisation receiving the individual’s services must operate payroll, make deductions for income tax and employee’s NICs and pay employer’s NICs on the fees received for the services.
In order to make these determinations in relation to individuals who provide their services through a PSC, organisations should:
- Look at their current workforce to identify those individuals who are supplying their services through PCSs
- Determine if off-payroll rules apply to any contracts that will extend beyond April 2020
- Start talking to their contractors about whether the off-payroll rules apply to their role
- Put processes in place to determine if the off-payroll rules apply to future engagements. These might include who in the organisation should make a determination and how payments will be made to contractors within the off-payroll rules.
HMRC has published a ‘Check Employment Status for Tax’ service to assist organisations with these determinations.
This change to the off-payroll working has been in place relation to the public sector since 2017. The impact of these changes has seen public sector organisations opting to err on the side of caution when making these determinations. However, making deductions for income tax and NICs impacts significantly upon the contractor and adopting the same risk averse approach in the private sector could result in increases in the fees charged by contractors who consider that they will be out of pocket as a result.
CHANGES TO THE PAYMENT OF EMPLOYER NATIONAL INSURANCE CONTRIBUTIONS ON TERMINATION PAYMENTS
On 16 October 2019, HMRC published for consultation draft regulations that will provide, also with effect from 6 April 2020, for real time reporting of the new Class 1A NICs liabilities under the National Insurance Contributions (Termination Awards and Sporting Testimonials) Act 2019. The consultation closes on 16 January 2020. The changes under the act will introduce a Class 1A NICs charge, but not employee NICs on termination payments taxable under section 403 of ITEPA 2003. As with income tax, the first £30,000 of such a payment is exempt from the Class 1A NICs charge.
The draft regulations provide that NICs liabilities on cash or cash equivalent payments are to be paid and reported to HMRC as they arise (rather than via the P11D(b)).
If you have any queries regarding these changes, please contact a member of our employment or tax teams.