For a long time, individuals have provided their independent contractor services to ‘clients’ through an intermediary, such as a personal service company (PSC). The main benefit to the individual is in receiving income as dividends rather than PAYE taxed income and saving employee National Insurance contributions and a huge degree of flexibility between the ‘client’ and PSC.
IR35 was incarnated in 1999 to tackle this type of situation and find ‘disguised’ employees to ensure that they paid the correct amount of tax (income and Class 1 National Insurance Contributions (NIC)).
#Under the old rules, the determination of the taxable status fell to the individual/PSC. It is obviously in the individual’s interest (who runs the PSC) to determine that they are not an employee. However, in reality, many were disguised employees that should have fallen with IR35 regime and paid PAYE tax and NIC as if they were an employee.
Roll out to the public sector
The IR35 rules were reformed and rolled out to the public sector in April 2017. So that the onus of determining the individual’s taxable status shifted from the PSC to the client.
Where the client finds that the individual is indeed an employee (using the HMRC’s online status check tool) they must also ensure that tax and NIC are deducted through the PAYE system.
Despite the reforms occurring circa two years ago, the CIPD and IPSE produced a report last year that found that, of the public sector:-
- 51% of hiring managers thought they had lost skilled contractors because of changes;
- 71% said they faced challenges in retaining existing their contractor workforce; and
- 15% said “no idea at all” how it would affect them.
Overall, however, there has only been a drop of those identified as outside the scope of IR35 by 9% according to the Office of National Statistics.
Roll out to the private/charity sector
Following a 12-week consultation period, ending May 2018, the government decided to roll out the reformed IR35 rules to the private/charity sector. The reforms will affect medium and large organisations from 6 April 2020.
Commentators, such as Tom Hadley, Director and Policy and Campaigns at the Recruitment & Employment Confederation have said that the changes risked damaging UK’s productivity and labour market flexibility. This comment mirrors the results of a poll, conducted by Robert Half, that of 398 senior decision-makers in medium and large businesses 62% are concerned about attracting temporary workers / skilled contractors, following the introduction of IR35 to the private sector.
Some organisations have already begun preparing for the changes. For example, Barclays Bank, HSBC and Lloyds TSB have decided to stop using off-payroll contractors through limited companies. Instead, they have brought them in as employees.
Other organisations are adopting a ‘wait and see’ approach because all the major parties, in the run up to the election, stated that they would review the rules. For example, Chancellor Sajid Javid said that the Conservative party would review the proposed changes and decide whether to take it forward or not.
However, HMRC is warning that organisations should continue on the basis that IR35 will be rolled out to the private sector as from 6 April. It is widely believed that plans for IR35 for the private sector will not be scrapped, they may be delayed and/or altered slightly but in light of the potential £1.1 - £1.3 billion in generated tax receipts in the first year alone, it is unlikely to be removed from the table altogether.
Despite the lack of legislation on this subject, the likelihood of the government scrapping a plan to raise over a billion pounds in revenue is highly unlikely. Therefore, it is important to act now.
So what should your organisation, as a client engaging services through PSCs, be doing? Firstly, check whether you are a small or large business, i.e. do you have two or more of the following:-
- An annual turn over of more than £10.2m
- An asset balance sheet of more than £5.1m
- More than 50 employees.
If you do not meet two or more of these requirements then you will not be caught by the amended IR35 rules.
If you do meet two or more of the above criteria then keep reading this piece, because below, we have identified some steps that all large companies should be undertaking. However, it should be remembered that the IR35 changes only apply to those who contract with you through an intermediary PSC.
- Conduct a contractor audit to determine who is contracting with you and carry out a Status Determination (you can utilise the Government’s Check Employment Status Test (CEST) tool using the link below) to decide whether these individuals falls inside IR35 or not.
However, the CEST tool has been slated for its inaccuracy. The government has confirmed that it will agree with the outcome of the CEST tool, provided that your organisation has taken reasonable care when answering the questions. We would recommend that, with our help, you develop your own audit tool.
- Once your organisation has completed the check, you must provide the individual/intermediary with a Status Determination Statement, explaining the reasons behind the decision of whether they are within the scope of IR35 or not.
You will also need to consider an appeal process for the contractor to dispute the findings.
- Keep up to date with current case law regarding IR35 and employment status.
In a recent case of RALC Consulting Ltd v HMRC, the First Tier Tribunal ruled against HMRC concerning the IR35 rules and assessing employment status for tax purposes.
RALC Consulting Ltd was a PSC of an IT contractor who argued that the contracts which it had with two main clients fell outside of the IR35 rules.
The First Tier Tribunal agreed with this argument on the basis that there was insufficient mutuality of obligation (the obligation on the client to give work to the PSC and the obligation on the PSC to take work when offered) to establish an employment relationship and that the individual concerned had a significant amount of control over his work.
This case demonstrates that the court views mutuality of obligation as one of the key indicators of employment status and is an aspect which it will focus attention on when determining whether a contract falls inside or outside of IR35
- Explore the variety of ways that you could interact with the contractors after the IR35 changes. It is important to include your contractors in this journey as they themselves may have some ideas that you have not thought of, including but not limited:-
- change the way your organisation engages with the contractor, for example, would making few changes to ensure that the contractor falls outside of IR35 and be a win-win for both parties;
- cutting ties with the contractor(s) though this may be seen to be counter-productive as it will then restrict your access to particular talent/labour;
- bring the contractors on as employees, as HSBC did, albeit there may be additional questions, outlined below and this may not necessarily be practical/achievable;
- re-negotiating the contract which may include increasing the individual’s rates to account for the deduction of PAYE tax and employees NICs, should the individual be at risk of being regarded as an employee; and/or
- have a relationship through an agency or umbrella company. This means that the employment of the contractor sits with that umbrella company, as the “employer” rather than your own organisation.
The changes are likely to hit certain sectors, like the construction sector mostly, harder than others, as PSCs are an invaluable tool to provide trade services on a flexible and financially advantageous basis.
We understand that organisations are concerned about attracting/retaining the talent pool that is required to effectively run the organisation and this new regime seems to fly in the face of the gig-economy with uber flexible working that is vital to the UK economy. However, there may be more difficult questions that come out of the woodwork, following a determination status statement, such as:-
- potential tax evasion questions; and
- employee associated rights such as holiday pay and/or unfair dismissal.
It is difficult to say, at this stage, how to deal with these issues, but it seems that a pragmatic approach to the early tackling of the issues will reduce the likelihood of any employee-related claims.
If you think that your organisation may be affected by IR35 then do not hesitate to get in touch so that one of our lawyers can get in touch and discuss how best to help you. Our office number is 01322 623700.