HMRC recently published guidance on the new IR35 rules from April 2020 but there was nothing practical in that guidance on how to deal, for payroll purposes, with payments to contractors where they are deemed employees.
To prepare for the new regime its important that engagers that contract directly with contractors’ intermediary entities (eg personal service companies) work through their processes and identify what changes are needed. If you decide, after checking the type of contractor intermediary and conditions of liability, undertaking a status assessment and issuing an SDS (status determination statement), that PAYE applies, there are several questions to consider.
- When will you pay the contractor and how often will invoices be submitted (the last thing you want is to run a daily payroll to pay contractors)?
- How will you physically make payments (see the issues below)?
- How will you advise the contractor of deductions (there may be no right to a payslip but most will want something showing deductions ahead of a P45)?
- Will the payroll be done in house or by an agent and does the agent’s terms cover this type of payroll?
- What happens if you receive an appeal to an SDS – will you pay after deductions or withhold payment and has this been agreed in the contract?
What HR process is needed?
You will need to obtain and document the contractor’s personal details, including their:
- national insurance (NIC) number;
- date of birth;
- P45 from previous employments in the tax year; and
- bank account details.
Deemed employees have no employment rights (to pensions, holiday pay, national minimum wage and statutory payments) so the process can exclude these areas.
What finance process is needed?
Paying the contractor sounds simple but might not be. For example, to calculate the deemed direct payment, you will need to:
- establish the amount of the payment less (if any) VAT;
- deduct so much of that amount as represents the cost of materials used, or to be used, in performance of the services and incurred directly by the contractor’s intermediary; and
- optionally deduct an amount representing expenses met by the intermediary that would have been deductible if the worker had been your employee and the expenses had been met by the worker out of those earnings. Note that there is no automatic 5 per cent deduction.
You then take the net amount (after tax and employee’s NIC) and add back the VAT in order to pay their invoice. One possible way to track this is to use the payroll to pay the VAT and expenses too, rather than VAT and expenses being paid via the purchase/expenses ledger and net fees via the payroll, but this can create an issue when accounting for VAT in the organisation’s books.
What payroll process is needed?
You should decide if a separate deemed employee payroll or accounting department will be used. using the new deemed employee marker in the Full Payment Submission. Problems might occur if this is not set, as the payroll team may think this is a normal employee and could calculate pension, student loan information etc. Furthermore, for the payroll to be correct, you will need:
- to know the period the invoice covers so the NIC earnings period can be determined (ie weeks or months);
- the NIC table letter (for example under 21, over state pension age, etc);
- starter declaration C or a P45 to determine the tax code;
- to know the amount which should be subject to tax, NIC and the apprenticeship levy; and
- to know when they leave as a P45 must be given.
To be ready for April 2020, engagers need to start planning as soon as possible.