Taxation of contractors
Some workers in the UK provide their services on a self-employed basis through an intermediary, such as a "personal services company"("PSC"), where the worker is both an employee and shareholder of the PSC. This can have significant tax advantages for the worker and to combat tax avoidance in this area, legislation was introduced which made it impossible to avoid UK tax simply by providing services through a personal services company. The rules (known as the "off payroll working rules") deem payments made to a PSC to be employment income if, were it not for the existence of the PSC, the relationship between a business organisation and worker would be treated (for tax purposes) as one of employment.
Until 2017, where the rules applied, it was the PSC that was responsible for accounting for the income tax and social security contributions due. The Government modified the rules in 2017 with the effect that, in the case of off-payroll workers in the public sector, it is the business (or other person paying the PSC's fee) which must collect the tax and social security contributions.
These changes were extended to large and medium-sized businesses in the private sector from April 2021 creating additional administrative and financial burdens for the relevant parties.
Although HMRC announced that they would initially take a gentler compliance approach as companies adjust to the new rules, we understand that they have set up a new task force to look into unpaid tax. It is therefore important that those engaging workers understand the supply chain through which they are provided, are aware of their obligations under the rules and have robust procedures in place to deal with the new rules.
The Government is currently considering the responses to a call for evidence on the use of "umbrella" companies; typically, these companies pay the employee's salary, operate PAYE and manage their employment rights with responsibility for sourcing the employee's work sitting with an employment business further up the labour supply chain. While the Government understands the useful role that umbrella companies can play in supporting a more flexible labour market, it is concerned that some operators of these arrangements are abusing the system through poor employment practices and lack of tax compliance.
New health and social care levy
On 7 September 2021, the Government announced the introduction of a new 1.25% levy which is intended to pay for adult social care reforms and enable the country's National Health Service to tackle the COVID-19 backlog. The levy (to be called the health and social care levy) will apply from April 2022 and will initially be collected by way of a 1.25 percentage point increase to the rates of National Insurance contributions. From April 2023 the levy will be charged separately and the rates of NICs will return to their 2021/22 tax year levels. In the context of employments, the levy will be paid by both employees and their employers (i.e. an additional 2.5% in total). For the self-employed (such as contractors or partners) the levy is payable by the self-employed person only. The rates of tax on dividend income will also be increased by 1.25 percentage points from this April.
Although there were calls for the NICs increase to be postponed given the recent rise in living costs, in his Spring Statement the Chancellor, Rishi Sunak, confirmed that the proposals will go ahead as planned. To ease the burden for lower earners, the Chancellor announced an increase in the threshold for employee NICs to £12,570 from 6 July which aligns it with the income tax full personal allowance.
At this stage, we don't yet know whether it will be possible to transfer the employers' liability to pay the levy to an employee (once the levy becomes chargeable separately from 2023) nor whether it will be governed by the protocol on social security agreed with the EU (referred to below).
National insurance contributions
For UK employers with workers in the EU, the EU/UK Trade and Cooperation Agreement (TCA) contained some welcome clarification on their social security obligations from 1 January 2021 following the end of the transition period. Importantly, a new Protocol on Social Security Co-ordination was agreed, replicating many of the previously existing EU rules, including those for ‘posted’ workers (known as ‘detached’ workers). All EU member states have opted into these new rules which means that workers moving temporarily between the UK and the EU will continue to pay social security contributions in their home state and receive necessary healthcare treatment in the country where workers are temporarily posted. It is still possible for EU Member States to opt-out at any time; however, they must give the UK notice and any postings that began before the opt-out will be protected. In November the UK and Switzerland also entered an agreement on social security coordination which largely replicates the pre-Brexit rules.
Tax-advantaged share plans – no change to EMI but perhaps reform of CSOP?
The Government has stated that following its recent review of the tax-advantaged Enterprise Management Incentive (EMI) plan it considers the existing legislation to be "effective and proportionately targeted". Although it is good news that the EMI plan is here to stay, it is disappointing that the Government hasn't taken on board changes that we and others suggested to make this important share incentive accessible to more companies, including those with private equity backing. The Government has said that it will now turn its attention to the other discretionary tax-advantaged share scheme, the Company Share Option Plan, to see whether it should be reformed to support companies as they grow beyond the scope of EMI. Nothing has been proposed at this stage but changes such as an increase in the individual limit (beyond £30,000) and the ability to grant options at a discount would be welcome.
