Off-payroll Working Rules and the Investment Management Industry From April 2020

With effect from 6 April 2020, medium and large organisations in the private sector will become responsible for determining the employment status of individuals who provide services to such organisations through intermediaries (such as personal service companies). Where the revised off-payroll working rules apply, such organisations will need to run payments to those intermediaries through payroll with appropriate deductions for employment taxes where they are the person paying the intermediaries. The rules potentially impact a number of arrangements commonly used in the investment management industry.

Overview

The original off-payroll (or “IR35”) rules were introduced in 2000 to combat arrangements whereby individuals who are, in substance, employees provide their services through an intermediary (usually a limited company of which they are the sole shareholder and director) in order to achieve employment tax and National Insurance savings. The IR35 rules require the intermediary entity to deduct the appropriate income tax and National Insurance contributions where, but for the arrangement with the intermediary, the individual concerned would have been an employee of the organisation contracting with the intermediary.

In 2017 the government introduced new "off-payroll" working rules to challenge such intermediary arrangements in the public sector. Broadly, the rules shift the compliance burden and tax deduction obligation from the intermediary company to the end user such that the relevant public authority must determine whether an engagement is caught by the rules and, where the rules apply, make payments to the intermediary after deducting PAYE and National Insurance. Following evidence of increased compliance (and, perhaps more importantly, substantial additional tax revenue) in the public sector the new "off-payroll" working rules will be extended to medium and large organisations1 in the private sector with effect from April 2020.

Draft Finance Bill 2019-20

HMRC has recently published draft legislation to implement the above changes. Amongst other things, the draft legislation sets out:

(i) that the client must make a decision as to whether the worker would have been an employee of it had the worker contracted directly with the client and it must exercise reasonable care in arriving at this decision;

(ii) the client must provide a status determination statement setting out its decision in i) above and its reasoning and provide it to the party with whom it contracted for the services of the worker. A failure to do so could lead to the client being liable for PAYE and NIC even if it isn’t the party paying the personal service company directly;

(iii) the client must comply with a status disagreement process if either the worker or (if relevant) deemed employee (essentially the person paying the worker if different from the client) disagrees with its decision and must re-confirm or change its original decision and communicate that with its reasoning to the other party within 45 days; and

(iv) if the new rules apply and the client is responsible for paying the personal service company directly, it must deduct tax and NIC from the payments it makes to it.

Impact on the Investment Management Sector

The new rules are not specifically aimed at the investment management industry. However, certain arrangements commonly utilised in the investment management industry ought to be reviewed in the light of the new changes. By way of example:

• It is relatively common for firms to outsource compliance functions to compliance consultants. Though the new rules should not apply to larger providers of compliance services, sole adviser operations contracting with a relatively small number of end clients over an extended period of time may be at risk. Similar risks may arise in respect of other outsourced functions such as HR.

• External sales consultants and IT contractors often contract through personal service companies. Again, if they provide services to a relatively small number of client firms on a consistent basis, the rules could potentially apply.

• Businesses providing a regulatory umbrella to investment management businesses (other than on a short term basis) should consider if the nature of their arrangements could give rise to a deemed employment relationship being created with respect to individuals seconded or provided to them by the investment management business.

Next Steps

This measure will have effect for contracts entered into, or payments made, on or after 6 April 2020. Medium and large sized companies should prepare for this change ahead of it taking effect. This should involve:

• Identifying current engagements where individuals provide services through intermediaries and determining whether, but for the intermediary, the contractor would be an employee. This may involve checking with Human Resources or accounts payable to identify relevant engagements. HMRC is currently improving its Check Employment Status for Tax (CEST) service (acknowledging that it is not currently wholly fit for purpose) and is expected to soon publish additional guidance on the new rules.

• Reviewing payroll systems to ensure that there is capacity to apply PAYE to payments made to intermediaries where necessary.

• Ensuring mechanisms are in place to comply with the new requirement to produce a "status determination statement" setting out the employment status of individuals who work for the organisation through an intermediary and the reasons for such status.

• Ensuring mechanisms are in place to comply with the new requirement to have a dispute resolution mechanism in place to deal with disagreements on the status determination statement.

• Considering additional changes from an employment law perspective including workers’ rights, equal pay, pensions and employee protections, and factoring such expenses and potential additional employer National Insurance contributions into forecasts. 

Footnotes

_{1) The off-payroll working rules will not apply to small companies. A company will be small where it satisfied at least two of the following: (i) turnover of not more than £10.2 million, (ii) a balance sheet of not more than £5.1 million and (iii) not more than 50 employees.}