On 7th February 2020, HMRC announced changes to the scope of payroll rules – the adjustments involve the enrolment of IR35 rule changes in the private sector. These modifications to the scope are to come into effect from April 2020, with many welcoming this latest announcement as sensible. What does the rule change look like and what is the scope of the further guidance on payroll rules?
HMRC’s announced rule change in action
HMRC’s new ruling means that only payments for services delivered from 6th April 2020 will be subject to the off-payroll rules in the private sector. This scope of payroll rules is a change from the previous proposition, which made the rules apply to payments made, irrespective of when the service was performed. In essence, the engager will review work performed by contractors for IR35 compatibility in the new tax year.
Any services perfumed by the contractor before the date will continue to be the responsibility of the contractor and his personal service company in terms of ensuring IR35 compatibility. It will also, therefore, continue to be the contractor’s duty to pay the right amount of tax to HMRC.
But from 6th April 2020, the engager (i.e. the end-client) has to determine if the services fall within IR35 rules and therefore, they are responsible for deducting income tax and employee’s NIC under PAYE from payments made for the services.
The updated guidance can be found in the revised off-payroll rules in the Employment Status Manual (ESM). At ESM10001a, the guidance states:
“The new rules will apply to payments made on or after 6 April 2020 only where the services were also provided on or after 6 April 2020…If the services were all provided prior to 6 April 2020, but the payment was made on or after 6 April 2020, the payment would not be subject to the new rules.”
The change is part of the government’s plans to change the tax treatment of off-payroll work in the private sector, aligning the rules with the changes implemented in the public sector in 2017.
Providing clarity to the scope of payroll rules
The announcement brings welcomed clarity to the scope of payroll rules. Originally, the drafted payroll rules were meant to apply to payments made to contractors on and after 6 April 2020. This was irrespective of when the work was performed and it was criticised by many for confusion. Under the earlier draft, work performed in March 2020 would have been drawn into off-payroll rules in cases where the payment terms were 30 days or more because the payment for the services would have not been paid until after 6 April 2020.
With the latest development, there will be much more clarity in terms of liability. There will be a clear cut-off date for the switch in payroll responsibility. The change is especially good because it aligns with the tax year. Contractors and engagers can treat the current tax year 2019/20 as usual, with the changes being implemented for the tax year 2020/21.
The current state of off-payroll rules
The change from payment date to performance date is a part of HMRC’s ongoing review of the off-payroll rules and their implementation. The objective is to ensure the aligning of private sector scope of rules for IR35 works as intended. The review is due to conclude this month but HMRC wanted to get this announcement out to allow businesses certainty over this particular issue – the payment point had been a common issue raised throughout the review.
Indeed, there have been growing calls to delay the rollout altogether. The professional bodies involved in the review of the scope of payroll rules have asked for the implementation of those changes to be delayed until April 2021. The concern is they are too complicated and end up creating compliance burdens for taxpayers, employers and HMRC.
In its official submission to the consultation, the ICAEW pointed out several concerns about the current proposal. Among the major points of concern were:
- The speed of implementing the changes.
- The problematic exemption for small companies, which would create an unsustainable tax system with greater administrative burden.
- The possibility of unfair results in terms of shifting liabilities.
Furthermore, in their response the ACCA said the proposed changes to tax legislation could lead to added confusion over employment status and harm the employment market. Considering the current jitters around Brexit, legislative changes such as this can end up hurting the private sector.
HMRC’s review is not the only current investigation looking into the rule change and its impact on the private sector. There is also an ongoing House of Lord Finance Bill select committee review into the draft Finance Bill 2019-20 that focuses on the extension of the rules to the private sector. However, this report is expected published after the Finance Bill is passed, meaning it might be too late to prevent those new rules from taking effect in April 2020. Time is running out in terms of delaying the implementation of changes to the scope of payroll rules.
How to get help with your payroll
The new guidelines can create confusion among contractors and engagers, despite this latest announcement. It is important to ensure you are aware of the scope of IR35 and how it might affect your contracts and payroll management. If you are unaware about the upcoming change to scope of payroll rules, don’t hesitate to talk to a professional. The wrong implementation could end up causing problems with HMRC.
We at Devonshire Green have a lot of experience in payroll management. Our team has worked with small businesses and contractors for years, providing us with the ability to solve all sorts of payroll problems. Contact us today to discuss how the current announcement impacts your business.
