Off Payroll Regulations (IR35) - A View of What Changes and What to Do Next
This is our view of what can been reasonably seen as happening in respect of the 6 April 2020 legislation changes. This is largely taken from communications from APSCo, RSM and various Payroll providers.
It serves as an outline and not a definitive guide. We will continue to provide updates and communications on process and best practice as information is available. Bright Purple are working with our partners to stay in touch and prepare to provide solutions to our candidates and clients that meet the legislation and need for business continuity.
- From 6 April 2020 the new off-payroll working rules will need to be applied when a worker is personally providing services to an end-user via their own intermediary (usually a personal service company or ‘PSC’) and that end-user is:-
- a public sector end-user; or
- a medium or large sized private sector end-user
- The end-user will need to assess whether the worker would be deemed to be an employee if (ignoring the PSC) they were providing their services directly under a hypothetical contract directly with the end-user.
- This will apply even where other parties sit between the end-user and the worker’s PSC in the labour supply chain.
- Where the end-user determines that the worker would be deemed an employee the fee payer will need to account for tax and NIC under PAYE when paying the worker’s PSC (including 13.8% employer’s NIC and, where relevant, the Apprenticeship Levy at 0.5%).
Determining what is inside or outside IR35
- From 6 April 2020, it will be the client’s responsibility to determine whether the off-payroll working rules apply, i.e. is this assignment “inside IR35”?
- HMRC provide a tool ‘CEST’ that is considered to be accurate by HMRC but widely regarded as insufficient to accurately determine where a role is inside or outside.
- HMRC have published a statement that they will provide a suitable tool and guidance ahead of the live date 6 April 2020
Best understanding of factors that influence a role being inside or outside IR35
There are more than status tests and some are considered to have differing significance by various parties, however they include:
- A genuine right of substitution
- Control and Direction
- In most cases where professional services are provided, it is important that a contractor can demonstrate a certain amount of autonomy in the way they undertake a project
- Indicating that the contractor will be supervised
- Including any “staff” benefits (including holiday or sick pay)
- Including start/end/break times
- Contractual clauses that specify any rights of control or supervision over the contractor
- Financial Risk
- Contractors taking financial risk would be expected to maintain appropriate insurances
- Mutuality of Obligation
- In essence, it is an obligation between the parties to provide and accept work. In an employer/employee relationship, mutuality of obligations is easy to establish.
- Provision of equipment;
- Any absence procedures;
- Continuity of the engagement;
- Termination agreements;
- Notice periods
- If the contractor has become “part and parcel” of the organisation
Reasonable Care When Determining what is inside or outside IR35
There are three instances whereby the client becomes the “fee-payer” and therefore carries the tax liability:
- Where the client fails to inform the supply chain and provide the status determination statement;
- Where the client-led disagreement process is triggered*, and the client fails to respond within 45 days; or
- Where the client demonstrates that they have failed to take reasonable care when assessing the IR35 status of the contractor.
We expect to get more guidance from HMRC on what reasonable care is.
* The draft legislation imposes an obligation on the client to provide a “client-led disagreement process”. The client must respond to a request to review the status determination statement within 45 days. The client must either confirm the determination is correct, with reasons, or provide a new status determination statement reaching a different conclusion and withdraw the previous one.
Although you carry the responsibility for making the status determination, the recruitment business will carry the tax liability. Therefore, it is to be expected that recruitment businesses may challenge status determination statements that they do not agree with.
Roles Inside IR35
Where a role is deemed inside IR35 Bright Purple will point to 2 options as an alternative to off-payroll working:
- Umbrella Company - Where an umbrella company employs the worker directly, the off-payroll working rules do not apply.
- “Inside IR35” PSC (Limited company)– Should you wish to continue to engage a contractor who is deemed “inside IR35” via their PSC, we will need to calculate a “deemed employment payment” using the RTI (Real Time Information) payroll system. The deemed employment pay rate is the income of the worker after deductions, including both employee and employer NICs and the Apprenticeship Levy. Neither worker rights nor stakeholder pension rights apply.
There are various outcomes of how the cost will be managed and who bears them, our team will work with you on this.
What to Do Now and Next
We are still awaiting clarity on a number of issues surrounding IR35 but we take this steps and questions as sound advice based on what we know just now.
- Establish who is responsible for undertaking the supply chain review for each team and/or making the status determinations?
- Determine how will you make the status determinations – Online CEST tool? In-house experts (if so, which department/team)? External third-party? MSPs?
- How many of your contractors are working for you directly, meaning you are the “fee-payer”?
- How will you pass your status determinations down the supply chain? Who will manage and own this?
- How will you ensure that your determinations are made with “reasonable care”?
- How will you deal with status determination disagreements and queries? Which team owns this and what is the escalation route?