Companies should now prepare for the new legislation coming into force on the 6 April 2021. It will require medium and large employers who take on contractors via intermediary agents to carefully determine the status of that contractor.
Is the individual a genuine contractor or should they be determined as an employee?
The company must assess each person as to their requirement to pay national insurance and tax. The new law will cover medium and large businesses who have more than 50 employees and a turnover over £10.2 million and a balance sheet exceeding £5.1 million. The employer must have at least two of these characteristics to be caught by the new legislation.
So, what does this mean for your business if the new law applies to your company?
After determining the individual’s status, the decision must be conveyed to the individual and the intermediary party such as the individual’s agent. If it is decided the new law does apply the party making the payment to the individual will have to setup a payroll for PAYE to deduct any national insurance and income tax. Companies paying the individual directly must set up the payroll and if an agent pays the individual, the agent must set up the payroll. Failure to record the deductions for income tax and national insurance will result in the HMRC making the relevant party accountable for the income tax and national insurance. HMRC can apply interest and a financial penalty.
Contractual Agreement
There is an exemption to the legislation where a company has a contractual agreement with a service supplier for a fully contracted out service. The exemption will not apply when a company occasionally outsources a specific service to a third party. What amounts to a specific service will be determined by the facts of the relationship. HMRC will look at the nature of the service supplier’s business and the contract with the business customer. Also, the actual relationship between the individual, the service supplier, and the customer.
Companies should now take steps to assess all contractors and third-party agreements to assess each contract to determine if they may be potentially affected by the new law. Those contractors at risk of being determined as an employee will have to be notified of the determination. Contracts at risk should be reviewed to determine whether they are fall in the scope of the new legislation. Among other things, businesses should consider whether the contractor providing the services would be viewed as an employee in the absence of the intermediary, and differences in how contractors operate as opposed to employees. Where required contracts will have to be revised and the payroll schemes set up for the affected individuals. Companies should now adopt internal policies for status determination. Third party service providers should be made aware of the companies’ new policies and the potential impact on the working relationship between the company, individuals, and service providers.
Please contact Quest if you require further advice to help you determine status and employment rights for those individuals you determine as an employee on 01455 852028.
