Here Andrew Secker, employment Partner at Mills & Reeve, explains the changes for Lawyer Monthly, with some suggestions on how to plan and proceed.
1. Changes to the tax treatment of off-payroll labour
The change
The most significant relates to changes to tax legislation regulating off-payroll working (commonly known as IR35) which comes into effect on 6 April 2020.
These new rules will require private sector businesses to deduct income tax and National Insurance contributions via payroll from fees for services paid to a personal service company (PSC) where the individual performing the services would, but for the PSC, ordinarily be regarded as an employee of the client company for tax purposes.
Whilst this is already the case in the public sector, extending this will hit sectors such as IT, technology, financial services and professional education where these arrangements are prevalent.
The treatment of individuals who are directly engaged by the client company — for example “Joe Bloggs” rather than “Joe Bloggs Limited” — will remain the same. The correct tax treatment of the fees paid to these workers will depend on whether they are in reality an employee of the client company for tax purposes, or if they’re genuinely self-employed.
It pays to be prepared for this reform. When similar changes were introduced in the public sector two years ago, many organisations were caught out, or attempted to impose “global” determinations, which were then challenged by their contractors.
What organisations need to do
- Audit off-payroll labour: It is a good idea to start doing this as soon as possible, as the audit process could take some time. It is likely businesses will need to make individual decisions and have different communications with each PSC.
The audit will be a factual investigation, looking at what each individual does in practice,
how they do it, what contracts they are engaged under, how they are paid etc. This may
also be a good time to audit any off-payroll labour that is not provided through PSCs.
- Consider the knock-on effects: The audit is likely to have knock-on consequences that may require legal advice. As well as determining employment status, you may need legal advice to amend or draft contractual documentation, to advise on the effects on pension liability, and to consider how this change intersects with rules around immigration, the apprenticeship levy, and the gender pay gap reporting figures and strategy. In addition, if liabilities are identified or a revised model for engaging your workforce is required, accountancy advice may be needed to quantify the position.
It is important to be alive to the consequences of an audit and consider privilege. Only legal advice on the employment status of off-payroll labour will be privileged. We have seen non-lawyers offering assistance with audits and advice on employment status determinations which would be discloseable to HMRC and in any subsequent dispute with workers.
2. New reference period rules for calculating holiday pay
The change
The reference period used to calculate holiday pay for workers with variable pay is changing on 6 April 2020.
Currently, this is the pay that a worker receives during the 12 weeks worked prior to taking a holiday. In Williams & Ors v British Airways PLC [2011] IRLR 948 (as applied in Lock v British Gas Trading and Ors [2014] IRLR 645), the ECJ held that holiday pay for the minimum four week leave entitlement under the Working Time Regulations must take into account “normal remuneration” such as contractual or regular patterns of overtime, pay allowances and certain commission payments.
This made reference period problematic for workers with variable pay. Fluctuations in pay meant that holiday pay would be higher if leave is taken immediately following peaks and lower holiday pay if it is taken following troughs.
Come 6 April 2020, the reference period will be change to 52 weeks, or the number of weeks of employment if a worker has been employed for less than 52 weeks.
What you need to do
- Consider when and how to make the change: For the purposes of holiday pay, many organisations begin their holiday year on 1 January. If that is the case, employers need to decide whether to change the way they calculate holiday pay on 6 April, or at the start of your holiday year. Organisations will need to consider the cost and practical issues which can arise, such as holiday carry over.
- Consider how you calculate holiday when if pay varies: Many employers have been considering how to include variable pay in holiday pay. Whilst the change in the law only affects the reference period, April 2020 may be a good time to review how employers calculate holiday pay more broadly. Advisers looking at this will need to consider how changing pay moving forward affects historic claims and manage employee relations.
Although these legal reforms may seem minor at first sight, they require legal input. Many have legal and financial consequences. Preparation is key to success here and the companies that start work on these changes now will be in a good position going into 2020.
