Changes now Delayed Until April 2021
Off-Payroll Working
In such cases, where a contractor works like an employee, the IR35 legislation ensures that the worker pays broadly the same income tax and National Insurance Contributions (NIC) as an employee. This counteracts the tax advantages offered by working through an intermediary.
The government feels as though many contractors are failing to comply with the legislation, despite it having been in place since 2000, and that the cost of this noncompliance will reach ￡1.2 billion a year by 2022/23.
The off-payroll working rules (also known as IR35) apply where a worker contracts with a client indirectly through an intermediary, such as a Personal Service Company (PSC). As such, the rules do not apply to self-employed workers.
As a result, changes are coming to how the off-payroll working rules will operate in the private sector from 6 April 2020.
This guide offers practical advice on the new IR35 rules and outlines how your accounting firm can get
contractor clients ready for the upcoming changes to their private sector engagements.
Overview of reforms
From 6 April 2020, medium and large private sector clients are responsible for deciding the employment status of workers and whether a contract is within IR35. Previously, this was the responsibility of the intermediary (e.g. the contractor’s PSC).
A client is considered medium or large if they meet at least two of the following three conditions:
• They have an annual turnover of more than £10.2 million
• They have a balance sheet total of more than £5.1 million
• They have more than 50 employees.
Where a client is not a company or a limited liability partnership, then a simplified test is used to determine size. Under the simplified test, a client with annual turnover of more than £10.2 million is considered medium or large.
For every contract agreed with an agency or worker, medium and large clients must issue a Status Determination Statement (SDS), which includes the reasons why an engagement is held to be within (or outside) IR35. The SDS should be passed on to the worker as well as any person or organisation the client contracts with. HMRC have provided a tool to assist with this known as the Check Employment Status for Tax (CEST) tool. If CEST is used to determine the employment status of an engagement, HMRC will honour the outcome as long as the correct information has been entered.
• Where a contract is within IR35, the entity that pays the intermediary (the fee-payer) should deduct income tax and employee NIC from payments. The fee-payer should also pay employer NIC to HMRC.
• The reforms only apply to payments made for services provided on or after 6 April 2020. This is a recent change following a last-minute review into the private sector reforms.
Exemptions
Small-sized clients are exempt from determining the employment status of their workers. This means that, for engagements with small clients, it will remain the responsibility of the worker’s PSC to determine IR35 status.
How are end clients reacting?
In 2017, similar off-payroll working reforms were introduced in the public sector. The reforms shifted responsibility for determining IR35 status from the worker’s intermediary to the public authority engaging them.
These changes caused their own share of problems, with reports of mass walkouts by public sector contractors. There were also rumours of public bodies taking a blanket approach, deeming all contractors working via an intermediary to be within IR35.
HMRC argued that there was “no evidence of blanket determinations” in the public sector and that there is no evidence to support the suggestion that blanket determinations will pose a problem in the private sector.
Despite these comments, there have already been reports of some private sector businesses implementing blanket measures, in an effort to sidestep the new changes when they come into effect.
For example, banks such as Lloyds are reportedly not planning on extending contracts with PSCs after March 2020. Instead, existing contractors may be offered to go on the payroll as a permanent employee, or contract via an umbrella. Barclays and HSBC are also reportedly taking similar approaches.
How can contractors approach the reforms?
The most common mitigation strategies available to contractors in light of the private sector reforms are outlined below.
Join a client’s payroll
Being on a client’s payroll has its advantages: IR35 is no longer an issue as all relevant income taxes and NIC are withheld at source. Further, employees have additional employment rights, including:
• Statutory sick pay
• Statutory maternity/paternity/adoption leave
• Minimum notice periods and protection against unfair dismissal
• Statutory redundancy pay
• A workplace pension
Note that some rights (such as redundancy pay) require a minimum period of continuous employment.
Becoming an employee may appeal to contractors who were effectively already inside IR35 when working for a client.
However, this option may not be best for contractors who are outside IR35 and do not want to lose flexibility in their working arrangements.
Move to an umbrella company
Under an umbrella arrangement, the contractor is employed by an umbrella company, which operates
PAYE and withholds NIC on payments. The umbrella also offers full employment rights and benefits. In return, the contractor pays the umbrella a fee for its services.
Although there are reputable umbrella companies, HMRC’s Spotlight 45 highlights what contractors and their advisors should look out for when spotting non-compliant umbrellas (for example, advertising that a contractor will be reimbursed in all or part through a loan without any income tax or NIC deducted, which is tax avoidance).
Disincorporate
Contractors could close down their PSC and engage directly with a client. By removing the intermediary entity, consideration of IR35 then falls away.
Unfortunately, disincorporating a limited company is not always straightforward. As the Low Incomes Tax Reform Group (LITRG) has previously commented, certain workers “stand very little chance” of closing down their PSC’s tax affairs correctly and may end up facing messy compliance issues that they do not understand.
Negotiate higher rates
If a contractor wants to continue engaging through their PSC, one potential mitigation strategy is to try and negotiate higher rates with clients and/or recruitment agencies, to offset the income tax and NIC that will be deducted from payments deemed within IR35.
However, the success of this strategy is dependent on whether a client or agency is receptive to a rate increase.
Decision Tree
Under the new reforms, contractors might struggle to identify who is responsible for determining IR35 status, particularly if they work for both large and small clients.
The decision tree below outlines what route may be available to a contractor according to their working situation.
How can we help you
With only a few weeks left before the reforms come into effect, there are a few key things that we can do to help our clients prepare.
Stay on top of the latest developments
The draft legislation for the off-payroll workings reforms initially appeared in Finance Bill 2019/20 in
July 2019. Although firms should already be familiar with the legislation, there are potentially more changes to come.
For example, as a result of a recent government review (only announced in January 2020) the private
sector reforms will now only apply to payments made for services provided on or after 6 April 2020. Previously, the reforms applied to any payments made on or after 6 April 2020, even if the work was carried out prior to then.
While the government’s review was expected to conclude mid-February, the House of Lords Finance Bill Sub-Committee separately announced on 4 February 2020 that it was seeking contributions to its inquiry into the private sector off-payroll working reforms.
However, the committee’s findings may not be issued until after the reforms have gone live.
Speak with at risk clients
Firms should also identify which clients operate through an intermediary and let them know about the upcoming changes. In particular, firms should speak to contractors about:
How their take home amount may change if they continue to operate through a PSC.
What mitigation options there are (e.g. moving to PAYE) and their pros and cons.
How your firm can assist, whether that’s by carrying out contract reviews or due diligence on umbrella companies, helping with SDS disputes, or using the CEST tool to make preliminary status determinations.
Ensure payroll software is up to the task
Our firm support clients that will be making payments to contractors within the new off-payroll working rules. If so, we make sure that appropriate payroll software is in place that can process payments for any contractors considered employees.
Effective Communication
Most contractors operating through an intermediary should at least be aware of the basics of the IR35 legislation.
If they aren’t, now is the time to get up to speed. We are reminding you to be aware about concepts such as mutuality of obligation, control, and the right to substitution, among others.
We also make sure that clients understand the difference between contracts that are subject to the new reforms (i.e. those with medium and large organisations) as well as what a contractor can do if they disagree with an SDS.
Equally, contractors should need to be aware that the new reforms do not apply to small-sized clients, and that their intermediary will remain responsible for determining IR35 status in such instances.
Scheduling time for review
It’s worth remembering that the off-payroll working rules should be considered for every engagement a contractor undertakes via an intermediary. We have already been reviewing with clients so that when:
• Takes on a new contract
• Experiences a change in how they are engaged, or
• Sees a change in the nature of the work they are carrying out
You should speak to us to see if your employment status needs to be reviewed. This may mean you need to stay in close contact with your allocated accountant (for example, clients with a number of short-term contracts) to ensure you remain compliant with the new rules.
Equally, it may be worth putting some time in the diary to catch up with your allocated accountant more generally after the reform’s rollout (for example, scheduling six monthly reviews). This then gives you time to explain to your allocated accountant how you’re adapting to the new off-payroll working rules more broadly and ask any general questions you may have.
Making sure we’re on the same page
Finally, ahead of April 2020, it may be worth taking some time to ensure that you fully understand your working arrangements, so that we can identify with you which contracts (if any) may be considered within IR35.
One way we could do this is by having your accountant and you each carry out their own status determination for a particular contract (we can direct the contractor to the CEST tool to complete their own determination).
We can then compare the results of your determination with our results to see whether you agree on employment status. Alternatively, the exercise may highlight areas of dispute (which could also potentially be found by an end client) and provide a platform to explore those areas in further detail. [1]
[1] Reproduced from an Intuit QuickBooks Guide posted by AccountingWEB