New IR35 Refresher
Understanding off-payroll working (IR35)
The off-payroll working rules
The off-payroll working rules can apply if a worker (sometimes known as a contractor) provides their services through an intermediary. The intermediary will usually be the worker’s own personal service company (PSC), but could also be any of the following:
• a partnership
• a managed service company (sometimes called a ‘composite’ company)
• an individual
The rules make sure that workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same tax and National Insurance contributions as employees. These rules are sometimes known as ‘IR35’.
The new IR35 Rules
The new IR35 rules were due to come into effect on 6th April 2020 but have been pushed back to April 2021 because of the coronavirus pandemic.
These will change the way in which contractor status is determined when working with medium and large organisations in the private sector (it already exists in the public sector).
The new legislation transfers responsibility away from the contractor and is designed to reduce the number of cases of disguised employment in the UK. HMRC are also trying to prevent contractors working via PSC from gaining an unfair tax advantage over employees of their end-clients.
Small private sector businesses are not affected by the IR35 changes, and contractors/PSCs will continue to determine their own employment status when working with smaller organisations.
Where a contractor is deemed to be operating inside IR35, whoever pays the contractor’s fees will also be responsible for paying any tax and National Insurance Contributions (NICs) that become due. This includes paying the relevant employer NICs.
Impact of the new IR35 rules
The new rules for off-payroll working will affect contractors operating via PSCs, recruitment agencies, and medium to large end-client organisations in the private sector.
As mentioned above, small businesses in the private sector are currently exempt - by Companies Act definition these are limited companies with:
• 50 employees or fewer
• An annual turnover of £10.2 million or less
• A balance sheet of £5.1 million or less
If an end-client meets two or more of the above criteria, the new regulations do not apply and contractor status continues to be determined by the PSC. The new rules are applicable to all companies operating in the public sector, however, regardless of size.
HM Treasury Review
One key takeaway from the review, as indicated by the new Chancellor of the Exchequer, is that HMRC will not be ‘heavy handed’ in relation to non-compliance in the first year of the new rules. This is good news! Businesses will only have to pay penalties for errors in cases of deliberate non-compliance and (unless there is reason to suspect fraud or criminal behaviour) information resulting from the rule changes will not be used to open new investigations into PSCs for tax years prior to 6 April 2020.
Are you ready for the changes to off-payroll working?
Remember, the two key changes are that:
1. the ‘end client’ must formally assess whether the individual worker would be an employee/office-holder of the end client had they been directly engaged; and
2. if so, the organisation in the supply chain that pays the intermediary will be required to include the worker on their payroll, and account for income tax and national insurance contributions (NICs), including employer NICs.
So, how best should you approach the new rules?
The most suitable approach is likely to depend on the existing arrangements with contractors, but we are suggesting that businesses should consider the following:
1. Implement a process to assess the status of contractors
The end-client will need to prepare a 'status determination statement' for each worker, setting out the reasons for the determination of an individual’s hypothetical employment status. This must be provided to the individual worker and the party that contracts with the end-client and must be carried out with ‘reasonable care’.
HMRC operates a free online CEST (check employment status for tax) tool for this purpose, which is effectively a questionnaire to determine a worker’s employment status for tax and NICs purposes. This is the most sensible starting point.
If CEST is not used, then an assessment of whether the worker would be an employee if directly engaged must be made on the usual principles of taxation law (drawing on employment law rules). This can be a complex area and decisions are often very fact specific. If in doubt, please do get in touch.
2. Implement a process to deal with disputes regarding a worker’s status
Status determinations can prompt challenges by unhappy workers, particularly where a classification as ‘employed’ for tax purposes represents a change in the historic approach taken by an individual’s PSC (which will remain responsible for any failure to operate PAYE correctly prior to April 2020).
Individuals may be concerned that their revised classification will raise a red flag with HMRC about their previous compliance with IR35.
The draft legislation does not specify how dispute arrangements are to work in practice, but there is a requirement to have a process in place and to respond within 45 days with the outcome of the process.
For organisations with large contractor populations, which expect to be carrying out many status assessments, careful thought should be given to how the dispute resolution process will operate.
3. Review existing contractual relationships with suppliers
Identify supplier contracts that are likely to be affected as soon as possible. It will be necessary to understand the terms of existing contractual arrangements, including the number of parties in your contractor supply chains, in order to assess the likelihood of ending up as the fee-payer and so being 'on the hook' for taxes.
4. Consider other consequences
Some organisations have decided to dispense with PSC arrangements altogether and to engage contractors as employees (with the associated benefits that employment status entails).
Others will simply assess workers as hypothetical 'employees' for tax purposes (such that payroll taxes are deducted) but otherwise maintain the status quo. For those workers, the potential financial hit of their new arrangement may cause them to demand increased fees or to look across to their employed comparators and demand equivalent employment rights (such as the right to be paid the minimum wage, holiday pay and sick pay, or the right to join a pension scheme).
Both structures will see an employer NICs charge arise, which will most likely be passed back to the end client.
Those who are re-engaged as employees when the new legislation takes effect may start to question why this didn’t happen sooner, and argue that they have missed out on employment benefits during their period of engagement to date – opening the door to claims for back pay. Even in the absence of a valid legal claim, there is potential for strained relationships and an unsettled workforce.
What we say….
Keeping open dialogue early on with potentially affected staff could minimise the likelihood of disruption and/or staff engaging the dispute resolution process.
Contractors and end-user businesses already have a relationship and there’s typically going to be a desire to maintain that so use this to your advantage and don’t allow the new rules to put that working relationship at risk. It will call for parties to accept the new HMRC rules and through cooperation, find the best way forwards.
We can advise on individual cases of worker status so please get in touch on 01743 298000 or email richard@belltaylor.com