What is IR35?
The off-payroll working rules (commonly known as IR35 or ‘the intermediaries’ legislation’) have been in place for some time, originally introduced in 2000. The Rules were brought about to ensure that if a worker looks and acts like an employee, and works through an intermediary like a Personal Service Company/Partnership/etc, they should pay similar taxes to other employees.
What has changed?
The responsibility for assessing employment status has changed. From 6th April 2021, it is no longer the contractor that decides their own IR35 Status. Now, the end Client, who the PSC supplies their services to, needs to make a determination on whether the Off-payroll rules apply to the assignment.
What do clients need to do differently going forward?
Before a client engages a contractor and upon the instruction of a new role, the client is required to make a determination on whether the rules apply to that specific assignment.
Similarly, for all incumbent workers, the client will has to provide a determination on whether the Rules apply to the specific assignment the workers are engaged on. It is a requirement to send a written copy of the status determination along with the rationale or reasons why that determination was made. That determination is shared with all parties in the supply chain eg. with the agency and/ or an Umbrella company and/or Personal Service company. This determination is what we call the Status Determination Statement.
How does the tax liability flow down the supply chain?
Click here to view the attached illustration. This provides an example overview of the various parties in a supply chain and how the liability passes to each party when an action is performed or not performed as required.
Do the IR35 Reforms affect every organisation?
If the end client is a small company do I need to consider the Off-Payroll Rules?
The Reforms are not be applicable to any small companies as defined by the Companies Act 2006.
If the end client satisfies 2 of the following criteria:
- Annual turnover of no more than £10.2m;
- balance sheet total of not more than £5.1m or
- no more than 50 employees
then the small company is exempt from the changes. Unincorporated organisations with a turnover of less than £10.2m will also be exempt.
Where companies are exempt, it is the intermediary (PSC) that is responsible for applying to rules.
When a company becomes or ceases to become small in an accounting period, for the purposes of the off-payroll rules that change will apply from the start of the tax year following the end of the accounting period irrespective of whether the organisation is incorporated or unincorporated.
Small Companies Exemption Guide
I have a Contractor working remotely in the UK but we are based abroad. Do I need to consider the Off-Payroll Rules?
Yes - If the worker is working through a UK Personal Services Company, then they are a tax resident in the UK and they are therefore in the scope of the Off-Payroll Rules, even if you are based abroad.
Are there any risks if I don’t comply?
Yes. Your organisation could face significant fines for non-compliance. If you choose to ignore it or you issue determinations that have not shown reasonable care, you could face fines issued by HMRC that date back to the assignment’s start date. Furthermore, you could stand to lose critical resources from your organisation which could have a detrimental effect on the delivery of key projects. Lastly, you should consider the reputational damage and loss of credibility, which will have an impact on your organisation’s ability to attract and retain flexible resource in the future.
Contractor engagement options
What is a Personal Service Company (PSC)?
Otherwise known as a Limited Company, a PSC is the vehicle employing the Representative/ Contractor providing the services to the end Client. Usually, the Representative has a material interest in the Company, ie For a PSC this means they must own or have a beneficial interest in more than 5% of the shares of the company; For a partnership, they must be entitled to 60% or more of the profits of the partnership.
What is an Umbrella Company?
An Umbrella Company acts as an employer for Contractors by collecting fees for the Contractor’s services from the Agency/ End Client. The Umbrella company will deduct all employment costs and a weekly management fee for running your contract. The contractor will be paid after the normal employee’s deductions of Tax, National Insurance Contributions, and pension contributions.
What are the engagement options for contractors if their assignment is determined to be Inside IR35?
If their role is determined to be inside IR35 they can engage using one of the following options:
PAYE – the Agency will make the necessary tax and NI and statutory deductions from their pay.
Umbrella Company – the Agency will pay the Umbrella Company gross, and the Umbrella company will pay the contractor net of deductions.
Personal Service Company (PSC) with deductions – The agency will work with a Service Provider to ensure that the relevant deductions for the contractor’s PSC are achieved.
Does Staffing 360 Solutions legislate which Umbrella Companies a contractor can use?
Staffing 360 Solutions only works with FCSA accredited members. We also have an approved list of market-leading service providers who are contractually obliged to ensure the very highest standards of legal and tax compliance. These providers offer umbrella services as well as IR35 assessment services are as follows:
Staffing 360 Solutions have agreed to a preferential rate for all contractors wishing to use their services.
To find out more about why compliance is important: https://www.fcsa.org.uk/wp-content/uploads/2018/04/Compliant-Umbrella-firms-factsheet-2017.pdf
Key indicators for assessing employment status:
Is Control one of the areas that will influence a status determination?
Control is one of the key areas for consideration when determining the IR35 status of an assignment. Control will look at:
- How the services are carried out
- Where the services are carried out
- Whether there is any control by the client in carrying out the services
If the contractor is the party controlling how the services will be delivered, this would show that there is very little control by a third party and would indicate more of an Outside IR35 determination. However, if the Client controls the service provision then it is more likely the role will be determined as Inside IR35.
If the Contractor cannot provide a substitute for their services, would that put them inside IR35?
One of the indicators when making a determination is whether the contractor has been engaged to provide a personal service. Personal service is a strong indicator of employment status. As a permanent employee, it would not be an acceptable practice to send a substitute into their place of work to carry out their work. However if the contractor runs a business, it would be widely expected that if they were unable to attend services to carry out the services because they were carrying out work for another customer that they would be able to send a substitute to carry out the services in their absence.
Mutuality of obligation – what does that mean?
Another important indicator when making a status determination is whether there is an obligation on the client to offer the contractor additional work beyond the assignment period that was originally agreed and whether the contractor is obliged to accept that work offered. If there appears to be this obligation between the parties then this could point towards an Inside status determination. If there is no obligation to offer or accept additional work outside the agreed contract then this would lend itself to more of an Outside determination. This should not be confused with the requirement from a Client to offer extended terms to meet the additional requirements of a project that the contractor may be working on. If there is a requirement from the Client to continue the engagement then a new contract should typically be provided.
If the working practices on the work site compromise the Contractor’s tax status what can we do to address?
It is key that the contractor continues to operate as an independent business and as such any element of supervision, direction, and control and embedding them into the workforce could compromise their status. The working practices are key and as the Client, you will need to be clear at the outset how the services will be performed. If the contractor will be supervised, directed, and controlled day to day in the role, this should be made clear to the Agency upon job instruction and should be reflected in the status determination statement.
What is a status determination statement (SDS)?
The off-payroll rules carry a requirement for a Status Determination Statement (SDS) for all engagements where the services are provided by an individual working through an intermediary such as a Personal Service Company. The SDS is a statement that confirms the status decision made on engagement and the rationale behind that decision.
Who will decide whether the IR35 rules apply to an assignment?
It is the end client’s responsibility to determine whether the IR35 Rules will apply and for determining the employment status of the worker.
Who is the SDS shared with?
The SDS is shared with all parties in the labour supply chain. The SDS should be generated by the end Client and shared with the contractor and the next party in the supply chain, usually the entity that placed the contractor with you and who will act as Fee Payer (the Agency).
When does the SDS need to be shared?
For new engagements, an SDS should be given to the Agency and the contractor at the point of a role instruction or at the latest, before the assignment or supply of services commences. An Agency will not be able to deduct employment taxes until an SDS has been provided to the contractor and Agency.
What does ‘in scope’ mean?
If a role is deemed as in scope it means the contractor is deemed as an employee for tax purposes only and relevant tax and National Insurance needs to be deducted.
I have seen a lot of references to ‘Reasonable Care’ and ensuring that reasonable care is undertaken when making a determination. What does that entail?
Reasonable care was added to the legislation before the reform to the Public Sector rules in 2017. It was to prevent clients from making blanket determinations and to mitigate the risk of incorrect determinations being provided.
To meet the requirements of Reasonable care, we feel it would be sensible for Clients to ensure they have completed the following:
- Ensure all of the hiring managers are trained on the new rules and know how to apply them
- Have a well-documented determination and appeals process
- Make a status determination on each individual assignment/contractor rather than implementing blanket determinations
- Setup an IR35 working group internally who can assist with making determinations
- Ensure that there is good communication flow between contractors and agencies when making determinations
In what form should the SDS be supplied?
The SDS should be in writing and should detail the role, the determination, and the reasoned argument for why the end Client has arrived at the determination outcome. It should also detail the appeal process available to the Worker in the event the worker does not agree with the determination. It is also acceptable to provide a copy of the CEST determination, which can be downloaded/ printed from the CEST site and sent to the Agency and the contractor.
Status Determination Statements Guide
What if an SDS is not given?
The party in the labour supply chain that does not fulfill its obligations under the Off-Payroll Rules will be the party that will carry the liability for any underpaid tax and NIC’s. If the Client does not provide its status decision or the reasons for that decision, where requested and within the required timescales, or if it fails to take reasonable care in making its status decision, liability to deduct tax and NIC’s will move to the end Client. Similarly, if the end Client or Agency provides contrived arrangements designed to get a particular outcome from the service eg an Outside IR35 determination, HMRC would treat as evidence of deliberate noncompliance with associated higher penalties.
What is a Blanket Determination and can we do this for ease?
A blanket determination is the application of an IR35 status to apply across a large group of off-payroll Workers. In other words, where a Client determines that all contractors in a particular department, series of departments or company-wide are either Inside or Outside IR35. It is typically done without due consideration or assessment of the individual roles and is at odds with what the legislation is seeking to achieve. We would not recommend this approach as there is a requirement in the legislation that obligates end Clients to take reasonable care in its assessment of engaged contractors. Reasonable care was added to the legislation before the Reform to the Public Sector rules came into play in 2017. It was to prevent clients from making blanket determinations and to guard against inaccurate assessments being provided. For an end client to show reasonable care, we would advise the following steps:
- Ensuring that all the relevant staff members, and particularly hiring managers and those making the determinations, are well versed in the Off-payroll working rules
- Ensuring a well-documented process for determining the status
- Making a determination on each individual assignment
- Ensuring all relevant parties are included in the process of making a determination, eg Contractor, Agency, Hiring Manager
- Setting up an IR35 Working Party who can answer questions and provide clarity on determination outcomes
- Ensuring an appeals process is in place
Will an Inside IR35 assessment mean the contractor will have more employment rights?
The status assessment of Inside IR35 will have no direct bearing on a contractor's employment law status or legal rights.
Who is responsible for what?
What is the responsibility of the Agency?
The Agency must fulfill its obligations as Fee Payer by ensuring that payment made to the Contractor is aligned to the Status Determination Statement received by the Client. If the Status Determination Statement shows a determination of Inside IR35, then the Agency is responsible for calculating the payment due to the Personal Service Company or contractor as well as deducting any employment taxes, employee and employer National Insurance and reporting this information to HMRC.
Tools for making assessments
What tools can we use to arrive at a status determination?
There are various ways to arrive at a status determination. It will be your choice as to what your methodology will be to assess a role. You may choose to a single method or you may use a combination of methods to arrive at a determination. Assessment may be made utilising HMRC’s CEST (Check Employment Status for Tax tool) and/or an independent business specialising in IR35 assessments and/or the expertise of an internal team (HR/ Procurement/ Tax/ Hiring managers).
What does the CEST tool cover?
The tool asks a range of questions including (but not limited to):
- Who is completing the tool
- Type of intermediary the worker works through
- Whether the role is an officeholder role and whether the services provided relate to that office
- Whether the worker can send a substitute and has provided one in the past
- How much supervision, direction, and control is in the role
- Whether the worker has to pay for any materials in order to provide their services
- Whether the worker is part and parcel of the organisation ie integrated in the workforce
The tool will give an outcome of:
- The worker is an employee for tax purposes, which means that PAYE tax and NICS are due
- Worker is self-employed for tax purposes, which means the intermediary remains responsible for its own tax affairs
Appealing a Status Determination:
What happens if a contractor does not agree with our status determination?
Under the legislation, end Clients are expected to set up a status disagreement or appeals process to help resolve disagreements about the status decision that has been reached. The contractor or the Agency will be able to make representations to the end Client if the contractor or Agency does not feel the SDS reflects reality. This could involve providing the End Client with evidence (an independent assessment for e.g.). As the end client, you are expected to respond to those representations within 45 days of receiving a notification. The End Client can respond in 2 ways:
- inform the contractor or the Agency that they have considered the representations and decided that the SDS is still correct and give reasons for that decision OR
- Give a new SDS containing a different conclusion than the previous SDS is withdrawn
What is the effect on a Contractor’s pay?
What does it mean to a Contractor’s pay if an assignment is determined to be Inside IR35?
If an assignment is determined to be inside IR35, the PSC will pay income tax and Employee’s NIC to HMRC. The PSC also has to pay Employer’s National Insurance Contributions at 15.05%.