Gordons Employment Law Update – 14 September 2019
Thursday 12th September 2019
The IR35 rules, also known as the ‘off payroll rules’, are to ensure that any worker who is contracted via an intermediary, such as a personal service company (PSC), and who would otherwise be considered an employee, pays tax and national insurance contributions (NICs) as a normal employee would.
Since April 2017 public sector organisations have had to work out if an engagement falls within the IR35 regime and, if so, to report and account directly for the payment of the correct income tax and NIC payments. 6 April 2020 is the proposed date for this obligation to be extended to medium and large private businesses.
It will be for employers to assess which of its contractors, engaged via intermediaries, would otherwise be considered as employees (the ‘deemed employment test’). For those who, in employers’ eyes, fall within the ‘deemed employment test’, they will have all PAYE tax and NICs deducted at source, which will be accounted to HMRC. Whilst full details aren’t available yet, it is expected that late payment interest will be applied, along with other penalties, for failure to comply.
Employers’ decisions will be open to challenge by those who are taxed at source. Employers will need to be prepared to either confirming or reassess their decisions within 45 days of receiving representations.
In advance of April 2020, there are a number of steps towards compliance which employers will need to take including:
- Determining if their business is a medium or large company, defined as such if it has two of the following characteristics:
- turnover of more than £10.2 million
- balance sheet total of £5.1 million
- more than 50 employees
- Identifying any services provided by individuals though PSCs or other intermediaries.
- Determining if the off-payroll rules apply to any of these individuals. There is an HMRC test that can be carried out online to determine if IR35 applies (this test can be found here). HMRC will stand by the result, provided the questions are answered correctly. If the result is that IR35 does not apply, a copy should be kept to show that the test has been done.
- Where IR35 applies, putting in place the necessary measures, including consultation with affected contractors and starting an ‘onboarding’ process to ensure that income tax and NICs are reported and accounted for with effect from April 2020.
- Ensure that any future engagements via PSCs or other intermediaries are assessed before they begin to determine if they fall within the scope of IR35 or not.
Employers should err on the side of caution when applying the ‘deemed employment’ test, as it is highly fact sensitive and has been subject to inconclusive litigation in the Tax Tribunal.
We recommend that employers review their contracts with contractors engaged via an intermediary/PSC to minimise the risk that IR35 will be deemed to apply. However, a word of warning: what is in the contract should reflect what actually happens and should not be an attempt to disguise the true position and avoid paying tax.
Holiday Year Halfway Point
As we have passed the half way point in most firms’ holiday entitlement years, employers should be aware of the recent European Court of Justice decisions of Kreuziger v Berlin and Max-Planck-Gesellschat v Shimuzu. Both provide that employers need to take steps to encourage employees to take their outstanding leave in order to apply a ‘use it or lose it’ policy. If such steps are not taken the holiday can be carried over.
Whilst Brexit does cast some uncertainty as to the future relevance of these decisions domestically, best practice for employers using a ‘use it or lose it’ holiday system is to remind employees regularly during the year to take their holiday entitlement.
Term Time Holiday Pay
In The Harpur Trust v Brazel, the claimant was a visiting music teacher employed on a permanent zero-hours contract, who worked mainly during the term time.
The Trust argued that her holiday pay should be only based upon the weeks that she actually worked. In line with ACAS guidance for casual workers, her holiday pay was calculated on the basis of 12.07% of her total pay for the year (i.e. her term time work).
The claimant challenged this and argued that such a calculation was contrary to the Working Time Regulations and contended that her holiday pay should be calculated based upon 5.6 weeks per year, just like a full-time teacher (i.e. a week’s pay x 5.6).
This went all the way to the Court of Appeal, who agreed with the claimant finding that the Working Time Regulations did not make any provision for pro-rating holiday pay entitlement where an employee did not work a full year. The Regulations simply required calculating an employee’s weekly pay (by taking a 12-week average prior to the calculation date) and multiplying it by 5.6.
Any employers who are still calculating holiday pay for “part-year workers” at 12.07% of annual pay will need to change the way in which they calculate holiday pay.
40% Increase in Tribunal Claims
ACAS’s recently published annual report confirms that there has been a 40% rise in the number of Employment Tribunal claims being lodged in the past year.
These figures reflect the year-on-year increase in claims being brought in the Employment Tribunal since the abolition of tribunal fees in July 2017. The knock-on effect of this increase is being felt. A recent Employment Lawyers Association survey reported a marked increase in final hearings being listed over a year after the claim has been issued, as well as an increase in delays to the service of claims.
Employers should be aware of the increased propensity of employees to bring claims and, due to delays at Employment Tribunal, it will likely take longer to bring claims to a conclusion should they go all the way to a final hearing.
If you want to discuss or get more information about any of the issues in this update, please get in touch with us.