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Taxation of off-payroll working in the private sector

Taxation of off-payroll working in the private sector

From 6 April 2020, a law will come into effect which will potentially impose further tax collecting burdens on all but the smallest businesses.

Businesses currently collect tax for their employees and remit that to HMRC via payroll system. But this new tax legislation will create new duties on businesses over a certain size to decide the tax status of non-employed workers where personal services are provided via personal service companies (“PSCs”). If deemed an employee for tax purposes, the party paying the PSC will be obliged to collect PAYE and NICs on the payment and remit it to HMRC before it pays the balance plus VAT on the gross amount.

In addition, the payer will have to pay employer’s NICs – 13.8%. This tax burden moves from PSC to the party paying it. Supply chains will need to develop new systems to manage this change properly under sanction of picking up the tax liability if they do not.

How will this affect the Retail, Leisure & Hospitality Sector?

I highlight three points of particular relevance to the Retail, Leisure & Hospitality sector:

  1. Many businesses in the Retail, Leisure & Hospitality sector in Scotland may fall within the “small business exemption”.  If your business enjoys the small business exemption, the obligations stay with the PSC to manage their own tax affairs (and report and remit taxes due to HMRC).  However, the new rules will bite if your business meets two of the following conditions: £10.2M or more turnover, £5.1M balance sheet or 50 or more employees (so read on!)
  2. The typical workforce for businesses in the Retail, Leisure & Hospitality sector in Scotland will be staffed with employees, agency workers or zero hours workers. These categories of staff are already on your or your agency’s payroll. They are not off-payroll workers and are not affected by the new rules. The exception may potentially be more niche arrangements (for example, like IT, marketing or Finance where consultants may be contracted to provide personal services through a limited company), where the IR35 rules may apply but may be less commonly understood. That could present difficulties for the sector because the sector may not always recognise when the rules should be applied.
  3. Finally, there is one often overlooked area that may require careful consideration: Supply Chains within the Retail, Leisure & Hospitality sector in Scotland. There are many and varied commercial contracts concluded in this sector. Some of these contracts are for the supply of goods. Some will be for the supply of services. A few may be a mixture of both. The Retail, Leisure & Hospitality sector in Scotland should be checking its supply chain to ensure that there is no element of personal service in these contracts which could trigger an obligation on your business to make a tax status determinations and pass these on through the supply chain.

What is the risk?

As the end client, a failure to carry out a status determination, or to pass its conclusion and reasons on to the worker or down the supply chain to the payer, can result in you having to account to HMRC for PAYE and NICs where a gross payment has already been made to your supplier.

By Tricia Walker
Partner, Employment

Burness admin