The biggest shakeup in the contracting market is due to take place in April 2020. The Finance Act 2019, which will need to be reintroduced by the new government in December, will usher in a completely new regime for medium and large private sector businesses who use freelance or contract workers. This will bring the private sector into line with the public sector who have had to follow these rules since April 2017. Awareness of the rule change is very low amongst medium sized businesses, so we’ve put together this short blog to outline the main points for you.
If you’re a small organisation in the private sector you can carry on using workers operating through their own personal service company or partnership without being concerned about their status, as it will still be a matter for them to assess themselves.
The definition of small differs depending on whether you’re an incorporated business or unincorporated, for example a charity. To be defined as small the business must meet two out of three of the following criteria for two successive accounting periods, so for April 2020 that will be two accounting years ending no later than 30 June 2019:
- Turnover not more than £10.2m
- Balance sheet not more than £5.1m
- Average number of employees not more than 50
A small unincorporated organisation is defined as one that at the end of the calendar year that precedes the start of the tax year has turnover of not more than £10.2m.
These changes don’t affect your use of sole traders, although you have always had to assess their status when you start to use them within the business.
All affected businesses must assess whether, if they stripped away the limited company or partnership, the consultant/freelancer/contractor would have the same hallmarks as an employee.
If Yes, they must issue a Status Determination Statement (SDS) before payment of the first invoice with reasons why the rules apply to the consultant. HMRC’s CEST tool can be used for this purpose and will be updated for the private sector by the end of this year:
Add the consultant to the business’s payroll (agency’s payroll if an agency is paying the consultant)
- Deduct tax, NI, and apprenticeship levy from their invoiced fee
- Pay this over to HMRC as part of the employees’ statutory deductions
- Pay the net amount and any VAT and expenses to the consultant
- Issue a P45 at the end of the contract and a P60 at the end of the year
- You must not auto-enrol the consultant or offer any statutory payments or pay national minimum wage
If No, the business can choose whether to issue an SDS, but if they don’t and HMRC later decide they had made the wrong decision they will be liable for all the tax, NI and apprenticeship levy, not the contractor so it’s best practice to issue both Yes and No SDSs
On receipt of the SDS the consultant or the fee-payer (agency) can appeal, and the business has 45 days to respond and uphold the decision or withdraw it. In the meantime withholding tax and NI continues, so if the decision is reversed the payroll will have to be corrected to remove the worker and refund the tax and NI.
To find out more about how Zellis can support your payroll needs, get in contact with our experts today.