Off-payroll working in the private sector

Many years ago payroll was seen as a fairly straightforward job. Every pay period the tax and NI tables were opened, the P11s completed and payslips produced.

Everything was clear, measured, with nothing to worry about except statutory deductions.

Over the years computerised software was developed; then RTI: automatic enrolment followed and then the Employment Allowance and apprenticeship levy introduced.

Now, we can add to that list the Personal Services Company (PSC) and off-payroll working rules. First introduced in the public sector, from April 2020 they will be relevant to the private sector.

Personal Services Companies

For some time there has been a concern by Government that some people who were providing services through this type of company were in fact employees in disguise. Indeed, often an employee would leave employment on a Friday and return to the same position on the following Monday, but through a PSC.

Being employed through a PSC drastically reduces the income tax liability for the employee and NICs for both employer and employee. It allows for a small salary / large dividend payment to be taken and, even though the tax-free dividend allowance has been reduced to £2,000, paying tax on dividends at 7.5%, 32.5% or 38.1% is still more attractive than the rates of tax suffered by employees.

HMRC estimates that the tax gained through applying the off-payroll working rules to the private sector could be as much as £1.3bn in 2023-24. So, what happens now?

April 2020

From this date, the PSC is required to review the contract between the client and the worker to decide whether, if the PSC did not exist, the relationship between client and worker would be that of employer/employee. If so, then the off-payroll working rules apply.

The rules will apply to all private-sector employers except those who are defined as a small employer. The definition of a small employer is the definition contained in the Companies Act 2006 (CA 2006):

  • annual turnover must be under £10.2 million
  • Statement of Financial Position (Balance Sheet) must be less than £5.1 million
  • employ no more than 50 employees.

This definition is fine for limited companies, but not so easy to determine if an employer is unincorporated and does not produce a Statement of Financial Position. More information on how to deal with this situation is expected.

The CEST

The CEST (Check Employment Status for Tax) is a tool that can be used to check the employment status of the worker. This may have been done previously, but with new guidance due out it will be worth completing again. The three elements that the CEST tool considers are:

Personal service and mutuality of obligation

This element considers who performs the service, whether substitutions can be made and who organises and pays the substitute worker.

Control test

The second element considers who controls the work. Is the worker given a contract and told to ‘get on with it’ or can the worker be directed by a manager? Does the worker work at their own premises, to their own schedule using their own equipment or is the worker integrated into the organisation?

Overall picture

The courts have determined that the decision is made by ‘painting a picture from the accumulation of detail’, so consideration must also be given to such situations as who is exposed to the financial risk – employer or worker?

The CEST will produce a print-out of the decision which, if the information has been input accurately and honestly, HMRC will stand by the result.

Steps to take now

Below are some steps that should be considered now:

  • Is your organisation near, or in the last tax year, was near the ‘small employer’ threshold? How would you find out?
  • Consider processes that will need to be put in place to identify possible off-payroll workers.
  • Set up procedures that enable off-payroll worker information flows from the contract originator to Payroll so that payments can be correctly processed.

Process any payments for workers defined as off-payroll workers through the payroll software, ensuring that only income tax and NICs are deducted as per the regulations.

The FPS (Full Payment Submission) has been amended to include a box to tick for anyone defined as an off-payroll worker.

In Summary

If the employer or client is defined as a ‘small employer’ a huge sigh of relief can be taken – for now.

If however the organisation is defined as medium or large or looks likely to become a medium-sized organisation (as defined by CA2006) in the next financial year then work needs to be done to comply with the new rules.

This is only a brief outline of the new rules. If it is considered that they apply then further reading must be done to ensure compliance. And here we go again!

Further reading:

Julie Hodgskin is a fellow member of AAT, runs a licensed accounting practice and is a technical materials author for CIPP.

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