What is happening?
The Government is extending the off-payroll rules, which have applied in the public sector since April 2017, into the private sector. The new rules will apply to work done by contractors working through intermediaries such as personal service companies
The new rules will apply to all payments made to personal service companies (PSC) on or after 6th April 2020.
What is changing?
From 6th April 2020, the client, and not the contractor, will be responsible for assessing IR35 status. Where a contract is found to be inside IR35, tax and national insurance will have to be deducted before payment is made to the personal services company.
The tests to determine IR35 status are not changing.
Who does this affect?
All public sector organisations and medium and large private sector organisations. Small companies are exempt.
What is a small company?
A small company is one that meets 2 of the following criteria:
a. Annual turnover of not more than £10.2m (if the company is a subsidiary, group turnover must be considered)
b. Balance sheet total of less than £5.1m
c. 50 employees or less
What does being exempt mean?
The existing rules regarding IR35 remain in force i.e. the PSC will be responsible for determining their status.
What contractors are affected?
As a rule of thumb, those contractors working through their own PSC will be caught by these rules.
Contractors supplied by agencies who are paid on a PAYE basis by the agency, or who are paid on a PAYE basis via an Umbrella company fall outside of these rules. For these contractors, it is business as usual.
Making the tax status decision
The client will have to understand the IR35 rules and use an appropriate assessment tool to reach an accurate IR35 status decision (called a Status Determination Statement (SDS)). There are three ways clients can do this:
a. In 2017 the Government introduced the Check Employment Status for Tax (CEST) which is an online tool. https://www.gov.uk/guidance/check-employment-status-for-tax CEST has come in for significant criticism and the Government has been working to enhance the tool. HMRC have said that they will stand by CEST outcomes provided the information inputted is accurate.
b. Clients can develop their own systems to determine the status of the contractor. However, there is an obligation on the client to always use “reasonable care” when making its tax status determination. Failure to take reasonable care could lead to the client being liable for any unpaid tax and national insurance.
c. Work with an established IR35 external reviewer to provide advice on status determinations.
Clients should not make blanket decisions such as ‘all contractors are inside IR35’ or ‘all contractors are outside IR35’. HMRC have made it clear that any attempt to do so will be regarded as not taking reasonable care.
Agencies are unable to make the tax status decisions for the clients.
One word of caution, be wary of contract reviewers who say they can “get an assignment outside IR35” simply by adding an unrestricted substitution clause to a contract. Courts look at the reality of the engagement rather than just the contractual documentation. An ability to substitute by itself will not get an assignment outside IR35 if all other circumstances point to inside IR35. As with most things in life, if it looks too good to be true, it probably is!!
Passing status decisions through the supply chain
Having made the tax status decision, the client will have to pass that decision, together with the reasons for that decision to both the party they contract with (usually the recruitment business) and the contractor (including where the client does not have a contract with the contractor). Each party has to pass the decision down until it reaches the fee-payer i.e. the party next to the PSC in the supply chain.
Resolving disagreements over the status
The end-user client must set up a client-led status disagreement process to help resolve disagreements about the status decision reached. The client must respond within 45 days of receiving a query and must:
a. confirm that it has considered the representations made and decided that its SDS is correct, and give the reasons for that decision; or
b. give a new SDS containing a different conclusion and state that the previous SDS is withdrawn. If the client does not respond within 45 days, it will become the fee-payer
We are still waiting for a draft transfer of liability legislation. In the meantime, the proposals are that where the fee-payer is off-shore its responsibilities move up the supply chain to the next UK based entity. It is also proposed that liability should rest with a party that has failed to fulfil its obligations until such time as it does meet its obligations at which point liability moves down the chain. However, if HMRC is unable to collect the outstanding tax liability from a party, the consultation proposes that the liability should transfer back to the first party or agency in the chain, and if that fails, then HMRC will pursue the client. It is not appropriate for a client to ask an agency to indemnify it if the client does not do what it is required to do under the legislation.
We were expecting the final legislation in November; however, the general election has changed the legislative landscape and we now have to wait to see what the new government proposes. In the meantime, clients should:
1. Assess whether they will be affected or exempt from the off-payroll rules because they are a small company (or not) and should record this assessment. If exempt, tell their agencies, explaining why.
2. Assess who amongst their contractor population might be affected by these changes and why. We recommend that clients assess all roles filled by contractors, and not just those it identifies are filled on a given day by contractors working through their own personal services companies.
3. Identify who within their organisation can make IR35 status decisions and ensure that those individuals understand how to assess the status and have the appropriate tools to do so. If there isn’t an internal person to do IR35 status decisions, then engage a well-established external reviewer.
4. Put processes in place to pass down the status decision and the reasons for that decision.
5. Work with agencies who will have their own processes to implement.
6. Consider how the additional costs will be absorbed in the case of an inside IR35 decision. Contractors will be keen to protect their take-home pay.
7. Some contractors may be unwilling to work on an inside IR35 contract. In these cases, clients will want to understand which contractors may be at risk and take steps to mitigate them.
If you have any further questions, please do not hesitate to contact your Recruitment Consultant.