IR35 – Oaklands Global explores the impact of the new legislation
For any business that works with self-employed contractors, April 2020 is a month that will see significant changes to working practices. 6th April is the day that HMRC’s IR35 rules will be extended to individuals working on a self-employed basis in the private sector through their own limited companies, known as off-payroll workers.
If those individuals are not genuinely self-employed, the same tax and national insurance rules will apply as though they were employees and the client who engaged the off-payroll worker will be responsible for this, rather than the contractor. This new legislation will have a significant impact on the recruitment sector and Oaklands Global is preparing for the changes by implementing practical steps.
William Finden, MD at Oaklands Global spoke to Employment Status and IR35 expert Rebecca Seeley Harris about the implications of IR35.
WF: When do off-payroll working reforms (IR35) come into force in the private sector and what organisations will be impacted?
RSH: IR35 was brought into the public sector from 6th April 2017 and will be extended to the private sector from 6th April 2020. The new rules apply to all engaging organisations in the public sector, but only to medium and large-sized companies in the private sector. IR35 only applies to companies who are over the audit threshold so for a business to qualify as ‘small’ they need to be below 2 out of the following 3: £10.2 m turnover, £5.1 m on the balance sheet and 50 employees. Where the business is small, the original rules continue to apply so the contractor or personal service company (PSC) continues to assess their own position.
Within the aviation industry, this could affect companies from manufacturers to airlines and maintenance organisations that use contractors.
WF: What are the proposed reforms?
RSH: From April 2020, it is the responsibility of the ‘client’ who is a medium or large company to make the assessment as to whether the individual worker working through their own PSC is inside or outside of IR35. If the PSC is considered to be inside IR35, then they will be taxed as a deemed employee. It should be noted that the PSC is a deemed employee for tax purposes only, there are no employment rights.
The tax deductions are made by the ‘fee-payer’. If the client works directly with the PSC, then they are the fee-payer, if there is an agency, the agency is the fee-payer. There is also a new client-led challenge process so, the PSC can challenge the client’s decision. The client has 45 days from receiving the decision to provide a response. If they don’t comply the liability for tax will rest with them.
WF: Who makes the assessment?
RSH: From April 2020, it will be the responsibility of the ‘client’ to make the assessment. Many client companies are turning to agency partners to help on the assessment process which is a good idea to work with the labour supply chain but it must be understood that it is the client’s liability under statute, not the agency’s.
The assessment results in a status determination statement or SDS. The SDS contains the determination itself and the reasoning for the determination and the client must take ‘reasonable care’ in making the assessment. Unless and until the SDS has been given to the worker by the client, however, the client will be the fee-payer and liable for making any deductions for tax.
It is the client who has to come to the conclusion on the status of the PSC. HMRC provides a tool on their website that enables individuals, employers and agencies to complete the assessment and establish status of inside or outside IR35. Check Employment Status for Tax or CEST: https://www.gov.uk/guidance/check-employment-status-for-tax
WF: What assessments are there?
RSH: There are 3 types of assessment:
It is considered that the blanket assessment does not constitute ‘reasonable care’. This is when the company decides that all of its contractors are inside IR35, regardless of circumstances.
- Role based
This is acceptable by HMRC, but it is unclear whether it constitutes reasonable care. This is based on a role that has very similar terms and working practices. It is wise to also include the details of and evidence from the contractor when they are available, in order to constitute reasonable care.
This assessment is where all parties in the labour supply chain are involved in the assessment and is also called a collaborative assessment.
Whether you use a digital tool or assess the status manually, you will need an understanding of the employment status case law. There is no check list of factors and the various factors are weighted according to the circumstances. In the end, it is necessary to stand back and look at the whole picture to make a true assessment of the status of an individual. Ultimately, it is only the courts that can decide who is right or wrong.
WF: What company control can businesses expect over contractors that fall outside IR35 regulations?
RSH: The control factor is a very important part of the employment status test, which is used to establish whether the contractor is employed or self-employed for tax purposes. So to remain compliant, a hiring company’s control over contractors will diminish and project managers and company managers in general will no longer be allowed to supervise or direct contractors on what to do or monitor their weekly progress.
As the relationship with the contractor is a business one, they will be expected to deliver on the contract. So it is wise to ensure that the deliverables can be measured in the contract and that control will not be necessary.
WF: What are the key factors that apply to IR35?
RSH: Establishing whether you are inside or outside of IR35 is done by using the employment status test and the employment status test is made up of case law. There is no ‘one’ test that you can use, instead you have to rely on the key factors. The main ones being control, substitution and mutuality of obligations.
Control has four elements: what, when, where and how. It is the ‘how’ that is the most important. If the PSC is highly skilled, it is unlikely that anyone can tell them ‘how’ to do the job, so there is inevitably less control by the client.
Substitution is the opposite of personal service. So, if a person can substitute their services with another, then they are not providing personal services, which is the key stone to proving that an individual is employed. Substitution, however, rarely happens in practice, so should be relied upon with caution.
Mutuality of obligations (MOO) determines whether there are any continuing obligations on the client to provide any more work after the contract has ended and, in addition, whether the PSC has any obligation to accept that work if it was offered.
There are a number of other factors that are also important namely: provision of equipment, financial risk, opportunity to profit.
WF: What are the consequences of not complying with the new legislation?
RSH: From April 2020, it will be the client’s obligation to make the assessment. If the client fails to make the assessment, or to take reasonable care in making that assessment, then the obligation to deduct tax will be the responsibility of the client. If HMRC decides to do an investigation and finds that the client has failed in the obligations, HMRC can make a charge for the tax owed i.e. employers’ and employees’ national insurance contributions and income tax. It is also likely that they will add fines and penalties and possibly interest on top. The penalties can make up quite a substantial sum on top of the tax owed.
It would be very unwise not to comply with the legislation. It would be wise to put measures in place to make the assessments.
WF: Do you believe that IR35 could create a positive change in the world of work?
RSH: The reforms to the legislation will no doubt shake up the labour supply chain and weed out those businesses in the chain that are not compliant. HMRC have just bought in secondary legislation to make sure that the first agency in the chain is taking responsibility for the others lower down. So there is evidence that HMRC is hoping the legislation will have an impact on the labour supply chain.
The client also must understand that the flexible resource should not be treated as if they are a quasi-employee. So, this legislation should have an impact on those who are genuinely self-employed and ensure that contractors are treated as contractors.
WF: What are the solutions to companies that need to engage contractors that fall inside IR35?
RSH: If the PSC is assessed as inside IR35 then they must have tax deducted as a deemed employee. The PSC can be paid through invoice but most clients will probably opt to put the PSC through either an umbrella company or a professional employer’s organisation or PEO.
The main consideration where a PSC is deemed inside IR35 is the employers’ national insurance contributions (NICs). Depending on the payment mechanism, this will depend on who pays the Employers’ NICs, which at 13.8% is quite considerable. It is likely that the PSC will also request a rate rise to compensate for the tax deducted.
WF: Can you recommend any good publications or websites that can give further information on IR35?
RSH: There are some good articles on IR35 and employment status that I have written on Accountingweb and also ContractorUK has some good coverage.
WF: As a final piece of advice, what would you recommend as the first course of action to companies with workers who fall inside IR35?
RSH: Any companies that are affected need to carry out an employment status audit as soon as possible to establish what their position is likely to be post 6 April 2020. This audit entails looking at the contractor population and how they work with the client in practice and also checking the contract terms to ensure they are congruent with self-employment.
Having established what their position is likely to be, the client will then need to set up an assessment process to ensure that they are in the position to carry out the assessments for each PSC. They will also need to produce a Status Determination Statement or ‘SDS’ and this will be passed to the worker and the fee-payer.
If you have read this invaluable advice and still have queries about IR35 please contact us at Oaklands Global, we’re always happy to help: +44 (0)1892 536 472