Read our quick guide to payroll for new employees covering tax codes, the new starter checklist and student loans.

Payroll – how to deal with new starters

From a payroll perspective, there are various tasks that an employer has to perform when they take on a new starter.

For 2019/20 an employer needs to operate PAYE where the employee earns more than £118 per week (the lower earnings limit for National Insurance purposes). However, if any employees earn more than £118 per week, the employer must comply with RTI and report all payments to employees to HMRC (even those below £118 per week).

Work out what tax code to use

The tax code is fundamental to the operation of PAYE and it is important that the correct tax code is used. To ensure that a new employee is taxed correctly, the employer will need to know the correct tax code to use.

If the employee has a P45 and left their last job in the current tax year, the employer can simply use the code shown on the P45. If the employee left their last job in the 2018/19 tax year, the code on the P45 can be updated by adding 65 to codes ending in L, 59 for codes ending in N and 71 for codes ending in M.

If the employee does not have a P45, the employer will need to ask the employee to complete a new starter checklist.

New starter checklist

The new starter checklist enables the employer to gather information on the new employee. Even if the employee has a P45, it is still useful for the new starter to complete the checklist as it contains information which cannot be gleaned from the P45 (such as the type of loan where the new starter has a student loan which has not been repaid).

As far as establishing which tax code to use, the employee will need to select one of three statements:

  • A: ‘This is my first job since 6 April and I have not been receiving taxable Jobseeker’s Allowance, Employment and Support Allowance, taxable Incapacity Benefit, State or Occupational Pension’.
  • B: ‘This is now my only job but since 6 April I have has another job or received taxable Jobseeker’s Allowance, Employment and Support Allowance or taxable Incapacity Benefit. I do not receive a State or Occupational Pension.
  • C: ‘As well as my new job, I have another job or receive a State or Occupational Pension’.

The following table indicates what code should be used for 2019/20 depending on what statement the employee has ticked.

Statement tickedTax code to use
A1250L on a cumulative basis
B1250L on a Week 1/Month 1 basis
CBR

Does the employee have a student loan?

The employer will also need to establish whether the employee is making student loan repayments. If the employee has a P45 and is making loan repayments, the student loan box will be ticked. However, the P45 will not provide details of the type of loan. Student loan information can be provided on the new starter checklist, enabling the employer to ascertain whether the employee has a student loan, and if so what type, and also whether the employee has a post-graduate loan.

Tell HMRC about the new employee

The employer will need to add the new employee to the payroll and also tell HMRC that the employee is now working for the employer. This is done by including the new starter details on the Full Payment Submission (FPS) the first time that the employee is paid.

Partner note: The Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682), reg. 67B and Sch. A1, para. 35—44.

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If you’ve received a tax calculation or simple assessment from HMRC, don’t assume that it’s correct – HMRC can and do make mistakes.

Check your tax calculation

Each year HMRC undertake a PAYE reconciliation for employed individuals who are not required to submit a tax return to check that the correct amount of tax has been paid. Where it has not, HMRC will send out either a P800 tax calculation or a PA302 simple assessment.

P800 tax calculation

A P800 tax calculation may be issued if an employee has paid too much tax, or if they have paid too little and the tax underpayment can be collected automatically through an adjustment to their PAYE tax code. There are various reasons why a person who pays tax under PAYE may have paid the wrong amount of tax. This may be because:

  • they finished one job and started a new one and were paid for both jobs in the same tax month;
  • they started receiving a pension at work; or
  • they received Employment and Support Allowance or Jobseeker’s Allowance (which are taxable).

P800 calculations for 2018/19 are being sent out by HMRC from June to November 2019. 

If the P800 shows that tax has been overpaid, it will say whether a refund can be claimed online. If so, this can be done through the personal tax account. Where a claim is made online, the money should be sent to the claimant’s bank account within 5 working days. In the event a claim is not made within 45 days of the date on the P800, HMRC will send out a cheque. If an online claim is not possible, HMRC will also send out a cheque.

PA302 simple assessment

Instead of a P800 tax calculation, an individual may instead receive a PA302 simple assessment. This is effectively a bill for tax that has been underpaid. HMRC may issue a simple assessment if:

  • the tax that is owed cannot be taken automatically from the individual’s income;
  • the individual owes HMRC tax of more than £3,000; or
  • they have to pay tax on the State Pension.

A simple assessment bill can be paid online.

Check your calculation

If you receive a tax calculation or simple assessment from HMRC, do not simply assume that it is correct – HMRC can and do make mistakes. It is prudent to check that their figures are correct. When checking the calculation, check HMRC’s figures against your records, such as your P60, your bank statements and letters from the DWP. Check that employment income and any pension income is correct, and that relief has been given for expenses and allowances. HMRC have produced a tax checker tool (available on the Gov.uk website at www.gov.uk/check-income-tax) which can be used to check the amount of tax that should have been paid.

If you think that your tax calculation is incorrect, you will need to contact HMRC. This can be done by phone by calling 0800 200 3300. If you do not agree with your simple assessment, you have 60 days to query this with HMRC by phone or in writing. The simple assessment letter explains how to do this.

Partner note: www.gov.uk/tax-overpayments-and-underpayments

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Today’s blog covers the serious curtailment to letting relief for landlords coming April 2020 – read more here.

Curtailment of letting relief

Landlords have been hit with a number of tax hikes in recent years, and this trend shows no signs of abating. From 6 April 2020, lettings relief – a valuable capital gains tax relief which is available where a property which has at some point been the owner’s only or main residence is let out – is seriously curtailed.

Now

Under the current rules letting relief applies to shelter part of the gain arising on the sale of a property which has been let out as residential accommodation and which at some time was the owner’s only or main residence. The amount of the letting relief is the lowest of the following three amounts:

  • the amount of private residence relief available on the disposal;
  • £40,000; and
  • the gain attributable to the letting.

Under the current rules, periods of residential letting count regardless of whether or not the landlord also lives in the property.

From 6 April 2020

From 6 April 2020, letting relief will only be available where the owner of the property shares occupancy with a tenant. From that date, lettings relief is available where at some point the owner of the property lets out part of their main residence as residential accommodation and shares occupation of that residence with an individual who has no interest in the residence.

To the extent that a gain that would otherwise be chargeable to capital gains tax because it relates to the part of the main residence which is let out as residential accommodation, the availability of lettings relief means that it is only chargeable to capital gains tax to the extent that it exceeds the lower of:

  • the amount of the gain sheltered by private residence relief; and
  • £40,000.

Example 1

Tom owns a property which he lives in as his main residence. He lived in it for a year on his own, then to help pay the bills he let out 40% as residential accommodation.

In June 2020 he sells the property realising a gain of £189,000. He had owned the property for five years and three months (63 months).

The final nine months of ownership are covered by the final period exemption – this equates to £27,000.

For the remaining 54 months, private residence relief is available for the first 12 months and 40% of the remaining 48 months – a total of 31.2 months (12 + (40% x 48)). This is worth £93,600. (31.2/63 x £189,000).

Private residence relief in total is worth £120,600 (£27,000 + £93,600).

The gain attributable to the letting is £68,400 (£189,000 – £120,600). This is taxable to the extent that is exceeds £40,000 (being the lower of £40,000 and £120,600).

Thus the letting relief is worth £40,000 and the chargeable gain is £28,400.

Example 2

Lucy buys a flat for £300,000 which she lives in for one year as her main residence. She then buys a new home which she lives in as her main residence and lets the flat out for three years, before selling it and realising a gain of £96,000.

If she sells it before 6 April 2020, she will be entitled to private residence relief of £60,000 (30/48 x £96,000). The final 18 months are exempt as she lived in the flat for 12 months as her main residence. The gain attributable to letting is £36,000, all of which is sheltered by lettings relief (as less than both private residence relief and £40,000).

If she sells the property after 6 April 2020, the final period exemption only covers the last nine months, reducing the private residence relief to £42,000 (21/48 x £96,000). The remainder of the gain of £54,000, which is attributable to the letting, is chargeable to capital gains tax as letting relief is no longer available as Lucy does not share her home with the tenant.

Consider realising a gain on a let property which has also been a main residence prior to 6 April 2020 to take advantage of the letting relief available prior to that date where a landlord does not share the accommodation with the tenant.

Partner note: TCGA 1992, s. 224; Draft legislation for inclusion in Finance Bill 2019—20 (see https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/816196/Changes_to_ancillary_reliefs_in_Capital_Gains_Tax_Private_Residence_Relief_-_Draft_legislation.pdf).

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Do you avoid these five common mistakes when you’re computing your business profits?

Avoiding common errors when computing business profits

HMRC produce a range of Toolkits for agents, which highlight errors commonly made in returns so that agents can take steps to avoid them. The business profits toolkit provides guidance on errors that are found in relation to business profits for small and medium-sized businesses. They are helpful to anyone computing taxable business profits.

Risk area 1 – Record keeping

Good record-keeping is essential for business profits to be calculated correctly. Poor records may result in sales or allowable expenditure being omitted from the accounts, with the result that the level of profit or loss is incorrect.

Risk area 2 – Business income

The profit or loss will only be correct if all income is included in the accounts. Unless the business is an unincorporated business that has opted to use the cash basis, business income should be included on an accruals basis, matching the income to the period in which it was earned.

Not all sources of business income will be immediately obvious – the income of the business may, for example, include scrap sales, contra sales or barter arrangements. Cash sales may also be overlooked.

Risk area 3 – Expenditure

To ensure that the profit is not overstated, all allowable expenditure should be taken into account. However, a deduction is only permitted for expenses which are wholly and exclusively incurred for the purposes of the business. Attention should also be paid to specific prohibitions, such as for business entertaining.

Purchases and expenses should be reviewed to ensure that they have been included.

Sole traders and partnerships comprising individuals can use simplified expenses rather than claiming actual expenses.

Risk area 4 – Stock and work in progress

Where the business is one that holds stock, care must be taken to include it at the correct value – this is the lower of cost and net realisable value. Errors will arise if stock is overlooked or valued incorrectly.

Work-in-progress can be a complex area and advice should be taken to ensure that the treatment is correct.

Risk area 5 – Miscellaneous items

Miscellaneous areas should also be considered. These may include a review of post-balance sheet events and consideration as to whether any adjustment to the accounts is required. Staff costs should also be reviewed and amounts unpaid nine months after the end of the period should be added back. As far as directors are concerned, consideration should be given to the date on which amounts are credited to the director’s loan account.

Partner note: HMRC’s Business Profits Toolkit – see www.gov.uk/government/publications/hmrc-business-profits-toolkit.

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If you need help on how to time dividends, read our short article that explains the basics

Timing dividends right could help save tax

Timing the date of a dividend payment from a company can determine both the amount and the due date of the tax payable. This may be a particularly useful strategy in a close- or family-owned company.

The dividend allowance, which was originally introduced from 6 April 2016, was cut from £5,000 a year to £2,000 from 6 April 2018. Fortunately, the tax rates on dividend income, above the allowance, remain at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

The amount of tax payable on dividend income is determined by the amount of overall income an individual receives during a tax year. This includes earnings, savings, dividend and non-dividend income. The amount of dividend tax paid depends primarily on which tax band the first £2,000 falls in.

Accelerating payment

The timing of the dividend payment may have a marked impact on the directors’ and shareholders’ personal tax situation. A dividend is not paid until the shareholder receives the funds direct or the dividend amount is put unreservedly at his or her disposal, for example by a credit to a loan account on which the shareholder has the power to draw. If the personal tax allowance and basic rate band for a tax year have not been fully utilised towards the end of the tax year, payment of a dividend may mean that the unused portion can be mopped up.

Example

Graham is the sole director and shareholder of a limited company.

He is considering whether to pay a dividend before the end of the 2019/20 tax year. In that tax year he has other income of £25,000. He has retained profits in the company of £100,000.

For 2019/20 the personal tax allowance is £12,500 and the basic rate tax band is £37,500. The dividend allowance is £2,000.

If Graham pays a dividend of £27,000 before the end of the 2019/20 tax year, he will fully utilise his basic rate band, and will be liable to tax at 7.5% on the £25,000 of the dividend income (the first £2,000 of the dividend being covered by the dividend allowance).

Delaying payment

Where the shareholder already has income exceeding the basic rate band in one tax year, delaying the dividend until the start of the next tax year could save tax.

Example

Following on from the above example, say Graham has already paid himself a salary of £50,000 in the 2019/20 tax year, thus fully using up his basic rate band. If he pays the £27,000 dividend before the end of the tax year, he will pay tax on it of £8,125 (£27,000 – £2,000 allowance x 32.5%). This tax will be due for payment on 31 January 2021.

If he waits until the start of the next tax year (2020/21) to pay the dividend, and also receives a salary of £25,000 during that year, the tax due on the dividend will be £1,875 (£25,000 x 7.5%) – a potential saving of £6,250. Graham will also benefit from a delay in the due date for payment of the tax until 31 January 2022.

Fluctuating income

Dividend payments can often be timed to smooth a director/shareholder’s earnings year-on-year. Broadly, where profits fluctuate, a company could consider declaring and paying dividends equally each year, or by declaring a smaller dividend in the first year (when profits are higher) and treating the remainder of the payment as a shareholder loan. At the start of the next tax year, a further (smaller) dividend can be declared, which will repay the loan. Care must be taken with this type of arrangement, not least because the loan must be repaid within nine months of the company’s year-end to avoid a tax charge arising on the company.

The family business potentially offers considerable scope for structuring tax-efficient payments to family members using a mixture of both salary and dividends. A pre-dividend review may be particularly beneficial towards the end of the company’s year-end.

Partner Note: ITA 2017, s 8 and s 13A; F(No 2)A 2017, s 8;  CTA 2010, s 455

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Do you spend more than 6 months of the year outside the UK? Make sure you’re compliant

Non-residents landlord scheme

A non-resident landlord is a landlord who lets out property in the UK but spends more than six months in the tax year outside the UK. A special tax scheme – the non-residents landlord scheme – applies to these landlords. Under the scheme, tax must be deducted by a letting agent or tenant from the rent paid to the non-resident landlord and paid over to HMRC.

Tenants

A tenant falls within the NRL scheme where the landlord is a non-resident landlord and the rent paid to the landlord is more than £100 a week. Where the rent is less than £100 a week (£5,200 a year), the tenant is not required to deduct tax from the rent (unless told to do so by HMRC). The tenant is also relieved of the obligation to deduct tax if HMRC have notified the tenant in writing that the landlord can receive the rent without tax being deducted; however the tenant must still register with HMRC and complete an annual return.

Where the tenant pays rent to a letting agent, it is the letting agent rather than the tenant who must operate the scheme.

Letting agents

Letting agents must also operate the NRL scheme where they collect rent on behalf of a non-resident landlord, regardless of how much rent they collect (unless HMRC have informed the letting agent in writing that the landlord can receive the rent without tax being deducted).

A letting agent is someone who helps the landlord run their business, receives rent on their behalf or controls where it goes and who usually lives in the UK.

Complying with the scheme

To comply with the scheme, tenants and letting agents must

  • register with the HMRC Charity, Savings and International department within 30 days of the date on which they are first required to operate the scheme– letting agents should use form NRL4i and tenants should write to HMRC
  • work out the tax to be deducted each quarter
  • send quarterly payments of tax deducted to HMRC Accounts Office, Shipley
  • send a report to HMRC and the landlord by 5 July after the end of the tax year on form NRLY
  • provide the non-resident landlord with a certificate of tax deducted each year (on form NRL6)
  • keep records for four years to show that they have complied with the scheme

Calculating the tax

Tax should be calculated on a quarterly basis on:

  • any rental income paid to the landlord in the quarter
  • any payments that they make in the quarter to third parties which are not ‘deductible payments’

Deductible payments are those that the tenant or letting agent can be ‘reasonably satisfied’ will be deductible in computing the profits of the landlord’s property rental business. Reassuringly, in their guidance, HMRC state that they ‘do not expect letting agents and tenants to be tax experts’.

The quarters run to 30 June, 30 September, 31 December and 31 March. The tax deducted must be paid over to HMRC within 30 days of the end of the quarter.

The non-resident landlord

The non-resident landlord can set the tax deducted under the scheme against that payable on the profits of his or her property rental business. Partner note: The Taxation of Income from Land (Non-residents) Regulations 1995 (SI 1995/2002).

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A quick guide to what should be included when calculating the profit or loss for a property rental business.

Property income receipts – what should be included?

When calculating the profit or loss for a property rental business, it is important that nothing is overlooked. The receipts which need to be taken into account may include more than simply the rent received from letting out the property.

Rent and other receipts

Income from a property rental business includes all gross rents received before any deductions, for example, for property management fees or for letting agents’ fees. Other receipts, such as ground rents, should be taken into account.

Deposits

The treatment of deposits can be complex. A deposit may be taken to cover the cost of any damage incurred by the tenant. Where a property is let on an assured shorthold tenancy, the tenants’ deposit must be placed in a tenancy deposit scheme.

Deposits not returned at the end of the tenancy or amounts claimed against bonds should normally be included as income. However, any balance of a deposit that is not used to cover services or repairs and is returned to the tenant should be excluded from income.

Jointly-owned property

Where a property is owned by two or more people, it is important that the profit or loss is allocated between the joint owners correctly. Where the joint owners are married or in a civil partnership, profits and losses will be allocated equally, even if the property is owned in unequal shares, unless a form 17 election has been made for profits and losses to be allocated in accordance with actual ownerships shares where these are unequal.

Where the joint owners are not spouses or civil partners, profits and losses are normally divided in accordance with actual ownership shares, unless a different split has been agreed.

Overseas rental properties

Where a person has both UK and overseas rental properties, it is important that they are dealt with separately. The person will have two property rental business – one for UK properties and one for overseas properties. Losses arising on an overseas let cannot be offset against profits of a UK let and vice versa. Proper records should be kept so that the income and expenses can be allocated to the correct property rental business.

Furnished holiday lettings

Different tax rules apply to the commercial letting of furnished holiday lettings and where a let qualifies as a furnished holiday let it must be kept separate from UK lets that are not furnished holiday lettings. Likewise, furnished lets in the EEA must be dealt with separately from UK furnished holiday lets.

Getting it right

Good record keeping is essential to ensure that not only that all sources of income are taken into account, but also that any income received is allocated to the correct property rental business.

Partner note: HMRC’s property rental toolkit (see www.gov.uk/government/publications/hmrc-property-rental-toolkit).

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If you use the property rental toolkit, do you think it’s useful?

Using the property rental toolkit to avoid common errors in returns

HMRC’s property rental toolkit highlights errors commonly found in tax returns in relation to property income. The toolkit can be used to help avoid those errors, some of which are discussed briefly below.

Computation

For unincorporated property businesses, the default basis is the cash basis where the qualifying conditions are met and the landlord does not elect to use the accruals basis. Where the business has moved into or out of the cash basis, transitional adjustments may be needed.

In some circumstances, a trade of providing services may be carried on in addition to the let of the property; and in some cases, the letting may amount to a trade.

It is important the correct computational rules are used.

Record keeping

Poorly-kept records may mean that things are overlooked – income may not be taken into account and allowable expenses not claimed. Property disposals may also be missed.

Property income receipts

All income which arises from an interest in land should be included as receipts of the property rental business. Receipts can include payments in kind (maybe work done on the property in lieu of rent). It should be noted that casual or one-off letting income is still treated as income from a property rental business.

Profits and losses from overseas lets, from furnished lettings and from properties let rent-free or below market rent should be dealt with separately. For other UK lets owned by the same person or persons, income and expenses are combined to work out the overall profit or loss for the property rental business.

Deductions and expenses

Expenses incurred wholly and exclusively for the purposes of the property rental business can be deducted in the computation of profits. Problems may arise where an expense has both a business element and a private element (for example, a car or phone used both privately and for the business). A deduction can be claimed only for the business part where this can be identified and meets the wholly and exclusively test.

The way in which relief for finance costs is being given is shifting from relief by deduction to relief as a basic rate tax reduction. Ensure that the split is correct for the tax year in question and relief given in the right way.

Allowances and reliefs

There are various reliefs that may be available to those receiving rental income.

Rent-a-room relief is available where a room is let furnished in the taxpayer’s own home, enabling receipts of £7,500 a year to be enjoyed free of tax.

The property income allowance of £1,000 means that rental income below this level does not need to be returned to HMRC. Where income exceeds this level, the allowance can be deducted instead of actual expenses where this is beneficial.

Capital allowances can be claimed in certain circumstances. They are available on certain items that belong to the landlord and which are used in the business, for example, tools, ladders, vehicles, etc. However, they are not available for domestic items in a residential property for which a replacement relief is available instead. Capital allowances are similarly not available for plant and machinery in a residential property unless it is a furnished holiday let.

Losses

Property rental losses must be treated correctly. They can only be carried forward and set against future property profits of the same property rental business.

Checklist

The checklist within the toolkit can be used to ensure that everything has been taken into account and that nothing has been overlooked.

Partner note: HMRC’s property rental toolkit (see www.gov.uk/government/publications/hmrc-property-rental-toolkit).

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Self Assessment - Penalties for Late Filing and Late Payment

Are you late with your self-assessment return? Here’s what you need to know.

Penalties for late self-assessment returns

The normal due date for a self-assessment return where filed online is 31 January after the end of the tax year to which it relates. This means that self-assessment tax returns for 2017/18 should have been filed online by midnight on 31 January 2019, and self-assessment returns for 2018/19 must be filed online by midnight on 31 January 2020.

Returns do not have to be filed online – paper returns can be submitted. However, an earlier deadline of 31 October after the end of the tax year applies, so 31 October 2018 for 2017/18 paper self-assessment returns and 31 October 2019 for 2018/19 paper self-assessment returns.

A later deadline may apply if the notice to file the return was issued after 31 October following the end of the tax year. In this scenario, the deadline is three months from the date of issue of the notice to file, which will fall after the normal 31 January deadline. For example, if notice is given on 2 December, the filing deadline is the following 2 March. Where the notice to file is issued after 31 July but on or before 31 October, the deadline for filing a paper return is three months from the date of the notice (which will be after the usual 31 October deadline); however, the deadline for filing an online return will remain at 31 January, as this will be at least three months from the notice date.

Late returns

Penalties are charged where tax returns are filed late (unless, the taxpayer can demonstrate that they have a reasonable excuse for filing late which is acceptable to HMRC). The penalties can soon mount up.

A penalty will apply where a paper return is not filed by 31 October after the end of the tax year (or such later deadline as applies where the notice to file was issued after 31 July) or where an online return is not filed by 31 January after the end of the tax year (or by such later deadline as applies where the notice to file was issued after 31 October). If the paper filing deadline is missed, a penalty can be avoided by filing a return online by the online filing deadline.

Penalty amounts

An initial penalty of £100 is charged if the filing deadline is missed. The penalty applies even if there is no tax to pay.

If the return remains outstanding three months after the filing deadline, further penalties start to apply. For online returns, the key date here is 1 May, from which a daily penalty of £10 per day is charged for a maximum of 90 days (a maximum of £900). At this point, it is advisable to file the return as soon as possible – each day’s delay costs a further £10 in penalties.

Further penalties are due if the return remains outstanding after another three months have elapsed (i.e. at 1 August where an online return was not filed by 31 January). In this case, the penalty is £300 or, if greater, 5% of the tax outstanding.

A further penalty of the greater of £300 or 5% of the tax outstanding is charged if the return has not been filed 12 months after the deadline (i.e. before the following 1 February).

The penalties can soon mount up, and can reach £1,600 or more where the return is 12 months late. Outstanding returns should be filed as a matter of urgency. Penalties are also charged for any tax paid late.

Partner note: TMA 1970, s. 8; FA 2009, Sch. 55, para. 3 – 6.

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HM Revenue and Customs - IR35

Have you been affected by IR35?

Getting ready for off-payroll working changes

From 6 April 2020 the off-payroll working rules that have applied since 6 April 2017 where the end client is a public sector body are to be extended to large and medium private sector organisations who engage workers providing their services through an intermediary, such as a personal service company.

There are tax and National Insurance advantages to working ‘off-payroll’ for both the engager and the worker. The typical off-payroll scenario is the worker providing his or her services through an intermediary, such as a personal service company. Providing services via an intermediary is only a problem where the worker would be an employee of the end client if the services were provided directly to that end client. In this situation, the IR35 off-payroll anti-avoidance rules apply and the intermediary (typically a personal service company) should work out the deemed payment arising under the IR35 rules and pay the associated tax and National Insurance over to HMRC.

New rules

Compliance with IR35 has always been a problem and it is difficult for HMRC to police. In an attempt to address this, responsibility for deciding whether the rules apply was moved up to the end client where this is a public sector body with effect from 6 April 2017. Where the relationship is such that the worker would be an employee if the services were supplied direct to the public sector body, the fee payer (either the public sector end client or a third party, such as an agency) must deduct tax and National Insurance from payments made to the intermediary.

These rules are to be extended from 6 April 2020 to apply where the end client is a large or medium-sized private sector organisation. This will apply if at least two of the following apply:

  • turnover of more than 10.2 million;
  • balance sheet total of more than £5.1 million;
  • more than 50 employees.

Where the end client is ‘small’, the IR35 rules apply as now, with the intermediary remaining responsible for determining whether they apply and working out the deemed payment if they do.

Getting ready for the changes

To prepare for the changes, HMRC recommend that medium and large private sector companies should:

  • look at their current workforce (including those engaged through agencies and intermediaries) to identify those individuals who are supplying their services through personal service companies;
  • determine whether the off-payroll rules will apply for any contracts that extend beyond 6 April 2020 (HMRC’s Check Employment Status for Tax (CEST) tool can be used to determine a worker’s status);
  • start talking to contractors about whether the off-payroll rules apply to their role; and
  • put processes in place to determine if the off-payroll working rules will apply to future engagements. These may include assigning responsibility for making a determination and determining how payments will be made to contractors who fall within the off-payroll working rules.

Workers affected by the changes should also consider whether it is worth remaining ‘off-payroll’; providing their services as an employee may be less hassle all round.

Partner note: ITEPA 2003, Pt. 2, Ch.10.

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