UK Tax Alert

Most organisations will be aware that with effect from the 6 April 2021 transformative changes were made to the off-payroll working rules, commonly referred to as the IR35 regime, which apply to the private sector.

The private sector IR35 regime applies where an individual provides their services (directly or indirectly) through a personal service company (a PSC) to another person or entity (an End-User) in circumstances where, had the individual provided their services directly to the End-User rather than through their PSC, they would have been an employee (or office-holder) of the End-User.

Under the new regime, the End-User has an obligation to determine whether or not the arrangements involving the individual are one of deemed employment, and are also required to provide that determination to parties down the contractual chain. To the extent that the determination of the End-User is one of deemed employment, usually, it will then be for the party in the contractual chain which makes payments to the PSC (the Fee-Payer) to include the individual on their payroll and account for the relevant income tax and national insurance liabilities on the payments made to the PSC.

As a reminder, the new regime does not apply to private sector End-Users who are “small” meaning, for these purposes, an End-User which satisfies two or more of the following requirements:

• It has an annual turnover not exceeding GBP10.2m;
• It has a balance sheet total not more than GBP5.1m;
• It had an average of no more than 50 employees.

Where the End-User is part of a group, the tests for “small” are applied on a group-wide basis.

Given the significant impact that these reforms have on End-Users, Fee-Payers and any other party or agency which sits within a supply chain supplying the services of the individual to the End-User, all such organisations should already have taken steps to comply with their respective obligations under the new regime.

As a minimum, all such organisations should have reviewed the nature of, and their role in, any existing off-payroll engagements to determine which are likely to fall within the scope of the new regime. Affected organisations (in particular End-Users) should also have put in place adequate internal systems and processes to ensure compliance with their obligations under the new regime.

Prior to the introduction of the new regime, HMRC repeatedly gave assurances that, for the first 12 months of the new regime going live, they would adopt a “light-touch” approach to penalties for inaccuracies. However, this light touch approach does not apply where there is evidence of deliberate non-compliance and of course Fee-Payers would still remain liable for any income tax and national insurance contributions which should have been accounted for under the regime. As such, it has perhaps come as no surprise that there has been a great deal of activity from HMRC over recent months checking compliance with the regime.

At this stage this activity has taken the form of information requests, primarily focussed on the systems and processes organisations have in place to decide if the new regime applies and the tools being used to assist with status determinations. Additional areas of focus include views taken around contracted out services, use of umbrella companies and engagement of former PSC contractors as employees – the latter of which is likely to raise fresh concerns for contractors regarding their historic affairs given HMRC’s commitment that they will not use information acquired as a result of the changes to the regime to open new compliance checks for previous tax years.

In light of the above, any businesses who have not yet fully undertaken a review into the application of the new regime should do so now and those businesses who have already put systems and processes in place should take the opportunity to review the adequacy, and application, of those systems and processes. Any businesses who receive any request for information from HMRC should think carefully about the nature and content of any response.

DLA is well placed to advise clients on all aspects of their compliance with the new regime. For further information and assistance please contact David Smith or Richard Johnson from our Tax Group or your usual DLA Piper Employment Group contact.