April employment changes and one year’s notice of IR35

In one week’s time, it will be April (how can we be a quarter of the way through the year already?). Traditionally, April has always ushered in a number of employment changes, mostly relating to money. And this year is no different. Here are a few of them as a reminder:

• Itemised payslips – on or after 6 April, all workers (not just employees) will be entitled to an itemised payslip. Guidance on what payslip information employers are obliged to provide, and how to manage things like variable pay or variations caused by things like unpaid leave can be found here.

• Statutory rates and compensation limits – from 6 April, the maximum compensatory award for unfair dismissal will increase to £86,444 (from £83,682) and the limit on a week’s pay (used to calculate things like statutory redundancy payments and the unfair dismissal basic award) will increase to £525 (from £508). Other statutory payments, such as sick pay, maternity pay and paternity pay will also rise. See here for details. 

• National Minimum Wage – minimum hourly rates will increase from 1 April. Details of the increases can be found using the link above.

• Gender pay gap reports – The deadline for the second round of gender pay gap reporting is on 30 March for public sector employers and 4 April for private / voluntary sector employers. With the majority of organisations still reporting a gap, and in a number of cases a larger gap than last year, read Katie Lancaster’s recent blog on the practical steps that employers can take to reduce the gender pay gap further.

Extension of IR35 to the private sector – one year’s notice

Significantly, April 2019 also marks one year until IR35 (also known as off-payroll working) comes into effect in the private sector (on 6 April 2020). The reason for mentioning this now is because, a bit like the GDPR, the more preparation you can do in advance, the more likely you are to be able to mitigate against any potentially negative impact of the change.

I have previously written about the details of IR35 , so won’t repeat myself here. However, as a brief reminder, IR35 will make client organisations responsible for deducting tax and National Insurance Contributions (NICs) from payments made to personal service companies (PSC) where, if the PSC were hypothetically removed, the individual supplying the services would be deemed for tax purposes to be an employee of that organisation. For individuals and companies caught by this, it is likely to mean a greater tax liability.

No government guidance yet but a further consultation

When this change was announced in the 2018 Budget, the government promised “extensive support and guidance” to help businesses implement the new rules. This hasn’t yet appeared, but what we have had is a further consultation on how best to implement the reform which runs until 28 May.

A few interesting points have come out of this (which, if implemented, will apply to both private sector organisations, and to public sector organisations already subject to the off-payroll working rules):

• Responsibility for making the status determination will lie with the client organisation, applying the normal employment status tests. HMRC is clear that organisations should not make blanket determinations, for example, ruling all engagements to be within or outside the rules, but should give due consideration to the facts of each particular engagement. To help make determinations, the government is in the process of enhancing its Check Employment Status Tool. We will keep you informed of progress on this.

• HMRC is proposing that client organisations must inform both the entity with which they contract and the end contractor of its status determination and, if requested, the reasons for its determination. All recipients of the determination must then pass it on to the person with whom they contract. This is aimed at dealing with difficulties with long supply chains. It is therefore important that organisations get used to documenting their thought processes in coming to a decision.

• In the event of non-compliance, HMRC suggests that liability for any payments due will fall with whoever in the supply chain fails to comply with its obligations, with the possibility that it could ultimately fall to the client. If implemented, this potentially creates additional risks for organisations dealing with PSCs, especially where long supply chains are involved.

• The government has suggested that client-led disagreement processes are put in place to allow for determinations to be challenged. If implemented, clients will need to develop and implement processes to resolve disagreements.

So what can private sector organisations do now?

My earlier blog sets out practical steps which companies should be taking to prepare for IR35. In addition to these, it is worth reminding yourself about the sort of relationship you should (ideally) be seeking to have with contractors engaged by PSCs to try to reduce the risk of IR35 applying. For example:

• Avoid simply adapting your template employment contract for the purpose of engaging a PSC. Ask the PSC to suggest terms and consider whether it is possible to agree to them. Any variations in the task should be agreed and documented, rather than imposed.

• Remember, although it may feel artificial, your negotiations and dealings should be with the PSC and your correspondence should reflect that. Ideally, avoid focussing on who should do the work and where possible give the PSC discretion over that.

• Any agreement should focus on what the contractor is engaged to do (e.g. specific tasks, deadlines, standards etc), rather than how it should be done – the idea being to avoid implications of control or supervision which are more associated with employment.

• Engagements should be for a fixed term and where possible should be for a task which you do not have the skills to do internally. Avoid using a PSC arrangement to cover jobs which could be or were once done by an employee.

• As far as possible, contractors should provide their own equipment and have their own insurance to cover any risks or damage.

• Keep the engagement under review and watch out for potential slippage. Relationships will be assessed on an ongoing basis and it is therefore important to ensure that things like increased control or integration don’t creep in and change the nature of the relationship over time.

One final point to note: at this stage, the employment rights of individuals affected by IR35 will not be impacted by the new legislation. However, it is worth bearing in mind that last year the government issued a consultation on employment status which explored the case for aligning the employment status tests for tax and employment purposes. If such a change were to be made, it could mean that individuals deemed to be employees for tax purposes under IR35 could also benefit from enhanced employment rights. It is therefore worth taking time to get your ship in order now so as to mitigate against any such changes.

If you require further information about anything covered in this briefing note, please contact Amy Wren, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, March 2019