Major changes to employment tax, proposed in two government documents issued at the end of last month, could leave many Midlands businesses underprepared and exposed, according to Deloitte.
The consultation documents relate to the engagement of workers via off-payroll arrangements known as “personal service companies” (PSCs) and to the tax and NIC treatment of termination payments. Deloitte says both warrant closer inspection.
Commercial reasons for businesses engaging individual workers via PSCs include; covering a short term or specific business need, or because the individual wishes to take advantage of the benefits of incorporation and neither want to establish an employee-employer relationship. Nonetheless, PSCs do normally bring significant tax advantages for the worker. Anti-avoidance rules to neutralise these (“IR35”) are difficult to enforce. Where they do apply, it is the responsibility of the PSC to account for income tax and National Insurance.
One option under consideration is to make the engager responsible for deciding if a worker should be subject to income tax and National Insurance deductions. If so, the engager would also be required to make these deductions.
Harvey Smith, Employment Tax Director at Deloitte in the Midlands, commented: “If implemented, this would represent a huge change for many Midlands businesses in the way they engage contract staff. There would be a requirement to review all engagements via PSCs and consider the impact from an engagement, taxation and overall cost perspective.
“Engagers would face some form of employment status tax risk, whether the worker is hired as self-employed or via a PSC. But there would be little incentive for workers using PSCs to abandon them and become direct employees since the risk of incorrectly assessing their tax position would be borne by the engager. We are therefore advising companies to consider the impact of these proposals on their business, and respond to the consultation appropriately.”
The second proposed change is to tax and NIC rules on termination payments, which can be difficult to apply due to their complexity. Many struggle to draw a distinction between payments subject to full income tax and National Insurance and those subject to a £30,000 tax exemption and free of National Insurance.
A number of measures to reform these rules are proposed. One is aligning the tax and NIC treatment and, with certain exceptions, including for unfair or wrongful dismissal, only providing relief where the payment arises in circumstances equivalent to redundancy. This would mean the value of the exempt relief would apply to all types of payment made in connection with termination. It would increase in proportion to the employee’s years of service, but likely be less than £30,000 overall.
If implemented, the government’s proposals would fundamentally change the tax rules which a business needs to consider when an employee exits. For example, under the new exemption proposal, there could be an additional employer NI cost where the business delivers an exit payment that is not ordinary earnings but does not involve redundancy, or any payment that exceeds the new exemption threshold. Responses to the consultation are requested by HMRC by 16th October 2015.
These potential changes come at a time when other new tax responsibilities also need to be considered by employers. The process for agreeing tax free expenses with HMRC changes as of 6th April 2016 via an end to P11D dispensations and new statutory requirements to check employees have incurred expenses in relation to expense allowances, whether using bespoke or HMRC benchmark rates. The first quarterly intermediaries report is due to HMRC by 5th August 2015.
Smith concluded; “The latter will impact Midlands businesses where the worker is considered to be ‘personally providing services’ to an end user customer. Only the supply of a business’s own employees and intra-group supplies of workers are excluded. There is some relaxation of financial data where workers are reported through Real Time Information by someone within the supply chain, but personal details must still be reported in these circumstances. These changes will impact a range of Midlands-based industries, for example; employment agencies, construction, catering and IT sectors.”