Update: Taking Off the Blinkers: the Delayed UK “Off-Payroll Working” Reforms Are (Nearly) Here

One year ago, the UK Government announced that the changes to the off-payroll working rules (also known as IR35) (the “Rules”) would enter into force on 6 April 2021 rather than 6 April 2020, due to the impact of the COVID-19 pandemic. The Rules require clients that procure the services of UK-based individuals through an intermediary (so-called “off-payroll workers”) to determine whether there is, in fact, a “deemed employment relationship” between the individual and the client and, if so, to deduct income tax and National Insurance contributions accordingly.

Last year, we published a client alert which covered the following:

• A reminder about the off-payroll working rules for the private sector.
• Who is an “employee” under the Rules?
• Potential broader ramifications for existing contracts.
• Practical steps that businesses can take to prepare for the implementation of the Rules in April 2021.

Since our last update, HMRC has proposed certain amendments to the Rules to ensure they work as intended.

How Have the Rules Changed?

On 3 March 2021, HMRC proposed certain additional changes to the Rules as part of the Finance Bill 2021. A summary of the key changes is set out below:

1. Workers with non-material interests in the intermediary: HMRC proposes to narrow the Rules slightly to avoid a situation where an off-payroll worker who holds less than 5% of the beneficial interest of an intermediary, and whose payments are already taxed as employment income, from falling within the Rules. 

2. Anti-avoidance and information requirements: HMRC have introduced an anti-avoidance rule to ensure that any person who attempts to bypass the Rules will be liable to HMRC for the unpaid tax as if they were the end-user or client usually responsible to deduct such amounts under the Rules. Also, if any party provides any fraudulent information to another party in the supply chain, the party who provided the fraudulent information will be liable for the unpaid tax rather than the end-user. This will provide protection for organisations relying on third-party information to comply with the Rules. The requirement to provide information to the end-user has also been extended to the intermediary entity, rather than just the off-payroll worker.

HMRC have also reconfirmed that they will take a ‘light touch’ approach to penalties. Consequently, there will be no penalties for inaccuracies in the first 12 months of the Rules, regardless of when the inaccuracies are identified, unless there is evidence of deliberate non-compliance.

What Steps Can Organisations Take Before 6 April 2021?

If they have not already done so, organisations that may be subject to the Rules should review our earlier update and take the required steps to ensure that their arrangements with off-payroll workers through intermediaries are compliant, including checking the government’s Employment Status Tool. In particular, organisations should review current contracts with intermediaries to determine whether or not the Rules might apply to such contracts.

Dan Alam, London trainee solicitor, contributed to the drafting of this update.