Zarah ChoudharyTwo in five businesses plan to hire more contract workers in response to Budget tax changes according to Binder Dijker Otte’s (BDO) latest survey, but the accountancy firm warned employers not to fall foul of off-payroll labour tax rules.
In total, 43% of respondents to BDO’s survey of 500 mid-sized businesses said that they would look to hire more contract workers as a means of mitigating the rise in employer’s National Insurance Contributions (NICs) announced by the chancellor at the Autumn Budget.
However, BDO warned that unless they qualify as a ‘small business’ under the Companies Act, they will be subject to the tax rules for off-payroll labour which took effect from 6th April 2021 as an adjunct to the IR35 rules.
These rules were designed to ensure that where an individual works like an employee but provides services through a personal service company (PSC), they broadly pay the same tax and NIC as they would if they were a direct employee.
Until April 2021, the responsibility for compliance with the IR35 rules lay with the PSC.
From April 2021, the responsibility for determining whether the IR35 rules apply shifted to the ‘client’ or hiring organisation.
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.
If it concludes that these rules do apply, then it will be liable, as the fee-payer, for secondary Class 1 NICs. It will also be responsible for deducting tax and NIC from the payments made to the PSC.
Where the worker is engaged via an agency, the obligation to deduct income tax and NIC would fall on the agency or organisation in the labour supply chain making the payment to the PSC, but the client still needs to make the status determination.
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 that they are compliant with all other relevant tax and employment laws.
BDO warned that employers must also be careful where engaging self-employed workers, depending on what they do, how and where they work, they can also be reclassified by HMRC as de facto employees during a compliance check – leading to similarly painful NIC and PAYE adjustments.
John Chaplin (pictured), a partner in BDO’s employment tax team, said: “Understandably, many businesses are looking at ways to mitigate the impact of the employers’ National Insurance 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.”
