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Off-Payroll Worker changes – affecting both public and private sector

Draft legislation has now been published which sets out the intended changes to the Off-Payroll Worker provisions.


This article provides an update to the changes to Off-Payroll Worker or intermediaries legislation. Please also see our earlier articles:

Draft legislation has now been published which sets out the intended changes to the Off-Payroll Worker provisions. The changes will come into effect in April 2020.  

Whilst the main impact of these changes will be felt by the private sector who are being brought within these rules for the first time, some of the changes will also impact the public sector as the changes amend the existing off payroll worker rules which relate to the public sector.

It is important therefore that all organisations in both the public and private sector which use off-payroll workers are aware of the changes being brought in and take all necessary preparatory steps well in advance of next April.

What are the main changes?

  • The obligation to carry out a hypothetical employment test will be placed on the organisation for whom the individual is carrying out work (the ”Client”) with the party paying the worker’s intermediary (the ”Payer”) being responsible for making the appropriate PAYE and NIC deductions where the rules apply. The Payer will either be the organisation for whom the individual is carrying out work (the ”Client”) where the worker provides their services through a Personal Service Company (“PSC”) or an agency where there is a contractual chain. This obligation already applies in the Public Sector (where changes were introduced in April 2017).
  • There will be an obligation to pass information down the contractual chain. The Client will be required to carry out the hypothetical employment test and pass the outcome of this and the reasons for their determination (which will be known as the “status determination statement”) to the party they contract with in the chain, as well as the worker at the end of the chain.
  • There will be a transfer of liability along a contractual chain where there has been non-compliance within the chain. HMRC appears concerned that “fly by night” agencies could be placed within a chain and where HMRC decides that a tax liability falls on that agency, it would quickly become insolvent. HMRC has noted this possibility and the draft legislation includes provision to transfer liability for taxes where there has been non-compliance by a party within the chain and where it is not possible to recover taxes due from that non-compliant entity.
  • A Client-led dispute resolution process will be introduced with a failure to comply with the process, resulting in the Client being treated as the fee payer and liable for any taxes. A Client will have 45 days to respond to representations from the individual worker at the end of the chain (or the Payer) that they disagree with the outcome of the status determination statement. The dispute resolution process will require consideration of those representations and either the issuing of a new status determination statement or confirmation that the original status determination statement is believed to be correct.

Small Business Exemption

Private sector organisations which are small will be exempt from the new rules (and the current IR35 provisions will continue to apply to those cases). Companies (which include LLPs for these purposes) are small if they meet two of the following three tests:

  • An annual turnover of not more than £10.2million
  • A balance sheet total of not more than £5.1million
  • Not more than 50 employees.

Unincorporated businesses will simply have to satisfy the turnover test.

Public Sector

For the public sector who have already been working in an environment where the Client is responsible for carrying out determinations of hypothetical employment, and the Payer is possible for making the necessary and appropriate deductions for tax and NI, the obligation to pass the information down the chain, transfer of liability and dispute resolution procedures will apply equally.

Administration and Risk

These changes place a potential administrative burden on Clients. The following administrative steps will need to be carried out. These may be either straightforward or burdensome depending mainly on the extent to which Clients use off payroll workers.

  • The first step is to check if the Small Business Exemption applies (in which case the existing IR35 rules will continue to apply).
  • Clients who do not fall within the Small Business Exemption (or are close to breaching the relevant limits to qualify) should take steps now to identify those off payroll workers using intermediaries (usually PSCs) who it engages. Understanding the extent of the issue is important. Are significant numbers engaged at any one time or are engagements occasional? What are the points of entry of these workers and on what terms?
  • The next stage is to assess which of those identified off payroll workers would fall inside or outside of IR35 (i.e. would they be regarded as employees of the Client but for the imposition of the intermediary or intermediaries based upon a hypothetical contract directly with the worker).
  • Introduce any changes to improve on the issues identified in one above. For example:
    • Consider reducing the extent to which off payroll workers are engaged by relying on other sources (for example direct employment or via an umbrella company or engaging larger consultancies to carry out projects);
    • Training those managers within the Client who engage off payroll workers, about the requirements of the expected legislation;
    • Streamlining existing processes to ensure one point of entry and the ability to undertake the processes noted below.  
  • Introduce processes going forwards to comply with the forthcoming legislation including:
    • Carrying out an employment status test and producing an employment status determination. Can this be simplified (e.g. identifying roles/categories) or will each off payroll worker need to be assessed?
    • Put in place processes to deal with disputes.
    • Put in place processes to ensure that information in relation to employment status determinations are passed along the chain and to the individual worker.

Employment Status Determinations

These are at the heart of the current and (soon to be) amended legislation. Unfortunately determining whether the hypothetical relationship between Client and individual worker would or would not be one of employment, is far from straightforward. The test is complex and sometimes results in inconsistent outcomes by different assessors reviewing the same set of circumstances.

This is perhaps the most difficult aspect of the legislation and the reforms of April 2020 do nothing to assist Clients in undertaking these difficult assessments. The principals behind the legislation are straightforward. Unfortunately determining who does or does not meet the hypothetical employment test is not. Clients could adopt a cautious approach but that approach:

  • May result in additional financial burdens which may be unnecessary
  • May dissuade much needed expertise, not to engage with the Client
  • Will lead to disputes which the Client will be required to deal with under its dispute resolution process.

On the other hand, Clients could adopt a less cautious approach but run the risk of additional tax liabilities, penalties and fines being imposed by HMRC. Whilst one hopes that HMRC would adopt a lenient approach where clients have sought, in good faith, to comply with the legislation, there is no guarantee that this will be the approach taken.

The difficulties with the employment status test are well illustrated by the decisions of the first tier tribunal in a number of cases brought by HMRC challenging employment status determinations. In almost all cases to date, HMRCs challenges have been unsuccessful.

The most recent decision of Kickabout Productions Limited v. HMRC (released on 25 June 2019) illustrates, quite starkly, how difficult this determination can be. That case concerned a radio presenter (“H”) providing services via his personal service company and who had presented the same show on TalkSport radio for 3 hours every weekday for some 18 years. There was no right of substitution in relation to the work for Talksport, the services provided were clearly defined, a fee per programme was paid, some control over content, production etc was with Talksport, there was mutuality of obligation given that H was required to provide the services personally and TalkSport was then required to pay him.   The tribunal hearing the case consisted of 2 members; one decided in favour of HMRC, the other in favour of Kickabout. Both tribunal members provided their reasons for their decision. As the chair of the Tribunal decided in favour of Kickabout, his decision took priority over the other Tribunal member and HMRC were unsuccessful. This is the latest in a long line of tax tribunal cases concerning employment status that has gone against HMRC.

It is understood that a number of employment status cases already decided at First Tier Tribunal stage have been appealed to the second tier tribunal. It is hoped that clearer guidance can be provided on this issue shortly and in advance of the new legislation taking effect. However and particularly given the complexity of the test, we are not hopeful.

HMRC have also promised a significant update to their own on-line Employment Status test (commonly referred to as the CEST test). It is clear from case law that determining employment status is not a mechanical exercise of running through a checklist. Hopefully the updated CEST test will amount to much more than a checklist. The updated test is expected in the Autumn.

If the content of this alert raises any issues for you, please liaise with your usual contact or speak to Haydn Rogan, Partner at or 0161 214 0517.

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