The new Growth Plan was announced recently with many expected and unexpected changes, such as reversing the planned increase in corporation tax rates, SDLT reductions for residential properties and the reversal of this April’s rise in National Insurance contributions. Also amongst the changes taking effect from April 2023 is the repeal of the current off-payroll working rules introduced in April 2017 for the public sector and April 2021 for the private sector.
How do the current off-payroll working rules apply?
The off-payroll working rules apply when contractors operate through an “intermediary” (generally meaning a personal service company (PSC)), provide their services to a public sector client or to a medium or large private sector client and have a UK connection. If these requirements are met, the current rules require the client to determine the contractor’s deemed employment status and confirm this in a Status Determination Statement. If it determines the contractor to be essentially a deemed employee, but for the existence of the intermediary, the client will be responsible for the appropriate taxes, such as PAYE and National Insurance contributions, which should be deducted from the fee paid to the intermediary.
The current off-payroll working rules are anti-avoidance provisions. They ensure that contractors cannot reduce their tax liability by setting up an intermediary and choosing to pay themselves a lower salary and dividends.
For a more detailed explanation of the rules as they currently stand, please visit our previous insight article on the subject here.
So what does the reversal mean?
First and foremost, this means that the old off-payroll regime will be reinstated. Instead of the client being responsible for determining employee status, the PSC contractors themselves will be responsible for this and for paying the appropriate tax to HMRC. Contractors will need to carry out this exercise on a contract-by-contract basis. If they determine themselves to be working essentially in an employee-type relationship, but for the intermediary, the PSC will have to deduct PAYE and National Insurance contributions from the fee received from the client.
But how will this affect businesses in general? The reasoning for the change as stated in the Growth Plan is as follows:
“This will free up time and money for businesses that engage contractors, that could be put towards other priorities. The reform also minimises the risk that genuinely self-employed workers are impacted by the underlying off-payroll rules.”
Indeed, the current status determination responsibility is somewhat onerous for many clients of contractors. From April 2023, these businesses will no longer have to carry out regular assessments of a contractor’s status and so will also avoid the risk of getting that determination wrong, which can lead to them being liable for the outstanding tax and HMRC penalties. Businesses will also avoid the challenges which contractors can bring to the status determination. This reversal of the additional cost and increased administrative burden will be welcomed by many businesses.
That being said, are there any potential issues which could come from the changes? As the off-payroll working rules act as an anti-tax avoidance measure, one risk is that their repeal could increase tax avoidance again. Under the Criminal Finances Act 2017, businesses are required to take reasonable steps to prevent those who act for or on behalf of the business from committing tax evasion. If a contractor was considered by the business under the current rules to be a deemed employee, will the continued use of the contractor after April 2023, despite them reclassifying themselves, be considered a breach of the Criminal Finances Act 2017? It remains to be determined whether the reversal of the off-payroll working rules will have the desired effect of boosting growth for clients and those who are genuinely self-employed. In the meantime, businesses should continue to carry out the relevant status assessments but begin developing a plan of how they will operate after this repeal comes into effect.