The off-payroll tax rules (commonly known as IR35) are changing on 6 April 2020. Pension trustees who have members of their board paid for their services through a personal service company (PSC) may need to start making those payments net of income tax and NICs under PAYE. Although the rules have not been finalised (and HMRC are now reviewing some operational aspects), now is the time for trustee boards and corporate sponsors of pension schemes to check any arrangements involving PSCs to assess whether they need to take action.
What is IR35?
IR35 is a set of tax rules that apply where an individual provides their services to an end-user client through an intermediary. That intermediary is typically a company owned by the individual (or individuals) providing the services (i.e. a PSC). In the private sector, the PSC intermediary is currently responsible for deciding whether payments it makes to the individual are subject to PAYE under IR35. From April, the client or end-user (i.e. the trustee board or the corporate sponsor) will be responsible for deciding whether IR35 applies and, if it is also the entity paying the PSC, for operating PAYE (as is already the case for the public sector).
How could this affect pension trustees?
It’s most likely to be relevant where there is a trustee company which contracts with a PSC for it to provide the services of an individual as a director or the PSC is itself appointed as a corporate director. These arrangements will need to be looked at carefully to see if PAYE will apply from April.
Trustee companies may be able to rely on an exemption for small businesses. A business is small if it meets at least two of the following tests: (a) annual turnover of £10.2m or less; (b) balance sheet assets of £5.1m or less; (c) 50 or fewer employees. On the face of it, many trustee companies will qualify as small (the fund’s assets are ignored). However, the tests aggregate a group’s turnover, asset value and employees so, if the trustee company is a subsidiary of the employer’s group, it is more likely that the trustee company will not qualify as small.
Where a fund has individual trustees (rather than a corporate trustee) and a trustee provides their services through a PSC, the operation of IR35 is less clear and will depend on the circumstances of each case. In many cases, it is likely that the PSC will have contracted directly with the employer. Where this is the position, the employer will be treated as the end-user for IR35 purposes and assume the responsibility for deciding whether the rules apply.
How do you decide if PAYE applies?
The key question is: if the engagement had been directly between the individual and the end-user, would that relationship be treated as employment for tax purposes?
HMRC offers an online tool (CEST) that may help but each case has to be considered separately. The CEST tool can be relied upon but only if the information provided is correct and comprehensive. Key factors to consider include what services the individual provides, how these are regulated by the contract with the PSC and, just as important, what actually happens in practice. It is also important to emphasise that someone’s IR35 status has no relevance in determining their employment law status.
The first step for trustee boards and corporate sponsors is to determine whether any individuals provide their services through a PSC. If this is the case, then IR35 may be relevant but there may be an exemption on the basis of being small. Where the exemption applies, the PSC will continue to be responsible for operating IR35. Where the exemption does not apply, the responsibility may pass to the end-user. Here an assessment of the relationship with the individual and the PSC should be undertaken and consideration given to whether any steps can be taken to mitigate this. If in any doubt, trustee boards and corporate sponsors should seek specialist tax advice on this issue as a matter of urgency.