New Off-Payroll in April 2021

Tax Tips – Business Question:

As a medium-sized construction company, I am aware of the new off-payroll working rules due to come into force in April 2021. Can you explain some of the challenges my business might face?

Answer:

The construction industry has been applauded by the government for continuing to work through the Covid-19 crisis. But this has meant making enormous changes to the way they work, including introducing agile working practices, as well as having employees on furlough and working when their work partners were not.

Now businesses in the construction sector may need to amend their systems again to cope with off-payroll working.

The off-payroll working rules (a variant of IR35) were originally introduced in the public sector in April 2017. Since that time the rules have been tightened and changed. The roll-out of these rules to the private sector, although due to be implemented in April 2020, was delayed until 6 April 2021.

The off-payroll working rules will apply to all large and medium-sized engaging companies in the private sector, not just in the construction industry. Small engagers are not affected.

Where the off-payroll rules bite they re-characterise payments made to an intermediary in respect of the services provided by an individual as employment income, where those services could be shown to be akin to those provided by an employee.

The key difference with the current implementation of IR35 is that it will be the responsibility of the “end-user” to identify which services are caught by the off-payroll rules, and ensure that payment for those services is taxed under PAYE. The complexity of a construction business is that it may use many tiers of sub-contractors in order to complete a project.

The end-user will be responsible for:

• determining the employment status of each individual on a project, be it self-employed, employed, or worker; and
• ensure that if the supplier is a work that they are paid via PAYE by the “fee-payer” in the chain, which may be the agency that provided that worker.

Further complexity is that there are a lot of specialist self-employed workers in the construction industry that may not agree with the end user’s assessment of their employment status. Remember this assessment is made for each project a person works on, not for the entire working relationship between a contractor and sub-contractor.

The end-user, as well as having an obligation to share their assessment of employment status with the supplier, also has a duty to deal with appeals to that assessment within 45 days of the objection being raised.

Systems and processes need to be created to document the employment status determination process and the result. Those systems also need to allow for appeals to be made, by including details of the appeals process with the determination and have someone available to respond promptly to any appeals made.

The final complexity comes with how to pay a supplier company, which is supplying the services of an individual (now identified as a “worker”), while accounting for PAYE.

Many businesses have separate systems for supplier payments (principally designed around payment terms, VAT and CIS checking, and so on), and their payroll, yet those two systems will now need to work together.

What’s more, the payment made to the individual within the supplier company is a reverse calculation as the payment is after-tax, NIC, and any business deductions. This payment may have to be made without the knowledge of that individual’s PAYE coding and national insurance number if the supplier objects to providing those details.

There are also considerations to be made about the payment dates, as the contractual invoicing terms are unlikely to be the same as the payroll run dates unless some thought it put into this beforehand.

All in all, there are plenty of challenges facing your business and similar businesses like yours in the construction sector and some forward planning would be advised.

The advice in this column is specific to the facts surrounding the questions posed. Neither PKF-FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.