With so much out there at the moment, how much of IR35 do you truly understand?
IR35, in simple terms, relates to an individual, who for all intents and purposes, would be identified as an employee of an end-user (client) but has chosen to operate through an intermediary vehicle, such as a personal services company (PSC) to gain advantages on tax and national insurance contributions.
The purpose of the IR35 reform is to ensure that “disguised employment” is supressed, and that the correct amount of income tax and national insurance contributions are paid under the PAYE framework.
Contract terms being determined outside IR35 means that the engaged party can be seen as a genuine independent contractor. Their PSC will be paid gross funds without deduction for tax or national insurance by a client or staffing agency. Accordingly, their relationship between the client the PSC and its employee who is performing the work can be treated as a service/supply relationship.
Determining employment status is not an easy task. An entire industry has developed in attempt to create a consistent model that would globally satisfy independent contractors. HMRC themselves, have struggled to create a test which effectively answers their own question. Their CEST is widely regarded as inadequate even by its creators, not just because of its inconsistency but because it can often come back inconclusive.
How we go here & pending changes.
- In March 2020, COVID-19 delayed IR35 by one year to April 2021, IR35 was passed into Primary Legislation in July 2020. It will not be delayed or altered any further and will come into effect on the 6th of April 2021.
- The client (fee payer) is responsible for determining whether the contracts that they are offering sit inside or outside IR35 legislation, i.e. if payable fees must be taxed as though the contractor were an employee or a supplier. The end client can use a determination tool to do so.
- Responsibility for accounting for tax and NICs will rest with the fee payer (the body responsible for paying the contracted party) – this may be the client where there is a direct relationship with the PSC or the agency where there is one within the supply chain
- Liability for tax and NICs could pass to the client if it has failed to take ‘reasonable care’ in making the decision. It is not clear as to what constitutes reasonable care. Liability could also pass up the chain if the fee payer cannot pay.
- The supply chain and the contractor must receive the determination and the decision, once it has been completed.
- The contractor has the legal right to appeal the determination outcome, and the end client must respond to the appeal with 45 days, in writing giving reasoning.
What are your options?
Once you have completed the audit of your contract terms, you can determine what options are available to you.
- Outside IR35 – This option retains the status quo, and insurance products are likely to be able to mitigate the risk of an incorrect determination
- Pay as you earn (PAYE) – Contactors can always convert to become a PAYE engaged individual. However, is it widely considered that forcing a contractor into a PAYE set up would lead to reluctance to complete or accept assignments.
- Deemed Model – The contractor can remain as the director of their PSC, but for this particular assignment is deemed inside IR35, and the agency then has to withhold the appropriate taxes. This is helpful where a contractor flips between assignments to which a different status will attach.
- Umbrella – If a lot of role determinations are going to be inside of IR35, it may be an option to offer the services of an umbrella company to contractors, as the umbrella will withhold necessary taxes, but also offer PAYE benefits to the contractors like health and pensions. Using an umbrella contractor could also help mitigate IR35, as the contractor would be an employee of the umbrella company.
- Statement of Work Solution – if a piece of work can genuinely be delivered through milestone and deliverable-based outcomes, then SOW is a viable solution. With SOW, the agency becomes the ‘end-user’ rather than the client. However, the agency will still face the same issues of IR35 determinations if it uses contractors to fulfil its tasks.
SOW requires more work and though to put into place successfully. Deliverables need to be properly managed, described and measured. This may lead to additional costs to the client.
- Employed consultant – In this model, the worker is employed by the service provider, then redeployed to you as the client, and billed as days worked rather through timesheets or under a wider SOW agreement.
This model exposes companies to less risk because the workers are employed by someone else, however, it does not mitigate all risks. It also means that you are only paying for days worked.
In contrast to a true SOW agreement, it does not assume a high level of accountability or liability for the end project. And therefore has specific uses rather than being an answer to IR35.
The changes to IR35 are very much about industry self-policing rather than enforcement. It is still the case that HMRC does not have significant resources to pursue large numbers of contractors they suspect of being incorrectly determined as outside IR35, even if through their clients. That is not to say that they will not pursue cases and indeed may look to a high-profile scalp if they believe the measures are not creating the right compliance culture.
The initial recommendations for the Taylor Review that was adapted into the Good Work Plan went live in April 2020. One of the key points from the review was to look at tenure limits, with recommendations that 12 months may be optimal.
Whilst the Government has indicated a desire to adopt all the recommendations from the Taylor Review, tenure limits are not one of the points that came into effect in 2020. However, if the government were to adopt the 12 months as a limit, this could further impact the use of contractors for a sustained period.
It is imperative that any plans and determinations that were shelved in March 2020 be dusted off, reviewed and reinvigorated.
Given the unprecedented impact of COVID-19 on the economy, there will have been resource changes within organisations, and some IR35 knowledge/scope may have been lost along the way.
We’re here to help.
Optimus Shield recommendations:
- All original plans, processes and approaches to IR35 be reviewed, especially considering COVID-19 which may have impacted the ‘Control’ aspect of your working practice.
- Refresher training session on IR35 which our Optimus Shield trained professionals can assist you with
- Initiate assessment of the terms and condition of contracts
- Re-establish your contractor population (audit) as it will have changed since the March delay
- Any ’pre-March’ determinations completed for remaining contractor populations be re-completed and shared
- Any new contractor population since March 2020 needs to have a determination completed
- Re-familiarise yourself with the determination tool and process. Of you used CEST previously, also review this and ensure it is the right tool for your organisation to use for determinations.
- Ensure your appeals process is in place and ready to receive appeals
- Reinstate your communication processes, frequently asked questions and internal policies around IR35
- Update any of your IR35 timelines, especially with regards to pay/invoicing dates.
If you need any assistance with any of this. Optimus Shield is at the ready with our specialists to help you.