Tax experts have warned employers to avoid falling foul of off-payroll labour tax rules as more businesses shift to using contract workers ahead of changes to employer national insurance (NI).
A survey from consultancy firm BDO revealed that two in five (43 percent) employers plan to hire more contract workers to mitigate the rise in employer NI announced by the chancellor at the Autumn budget.
The firm emphasised that unless a business qualifies as a ‘small business’ under the Companies Act, they will be subject to the tax rules for off-payroll labour. These rules have been in place since 6 April 2021 and were an add-on to IR35 rules.
Under the rules an individual who works ‘like an employee’ but provides services through a personal service company (PSC) will need to pay broadly the same tax and NI as they would if they were a direct employee.
Prior to April 2021, the responsibility for compliance with the IR35 rules lay with the PSC. Now the tighter requirements mean that the responsibility for determining whether the IR35 rules apply lies with the ‘client’ or hiring organisation.
BDO explained that as the ‘client’, the hiring organisation is responsible for reviewing the individual’s engagement status and determining whether they should be classed as the organisation’s employees for tax purposes. Where the rules do apply, the business is liable, as the fee-payer, for secondary class 1 NI. The hiring business will also be responsible for deducting tax and NI from the payments made to the PSC.
When a worker is hired via an agency, the agency (firm that pays the PSC) is responsible for deducting income tax and NI, however, the client still needs to determine the individual’s status under the rules.
Small businesses who meet two of the three criteria (an annual turnover not exceeding £10.2m, a balance sheet totalling not more than £5.1m, and/or having an average of no more than 50 employees) are exempt from these rules. However, they still need to ensure they meet all other relevant tax and employment law requirements.
BDO also said that all employers need to be careful when taking on self-employed workers because they can be “reclassified by HMRC” as de facto employees during a compliance check. This will depend on what they do, how and where they work. If HMRC do decide to reclassify an individual or group of workers, the employer could face painful NI and PAYE adjustments.
John Chaplin, partner in the employment tax team at BDO, said: “Understandably, many businesses are looking at ways to mitigate the impact of the employers’ NI rises announced at the budget which come into force in April 2025.
“Our survey suggests that a high proportion will be considering taking on contractors to reduce the costs of taking on permanent staff. However, this brings with it additional complexity and employers will need to make sure that they are complying fully with the off-payroll labour tax rules.
“Failure to do so could lead to an HMRC compliance check and ultimately penalties for employers found to be in breach.”
