With the introduction of changes to the IR35 hitting the private sector in April 2020, and in preparation for our IR35 focused co-hosted Seminar on October 9th, I sat down with
Tina Wisener (Partner and Head of the Reading & Mayfair offices at Doyle Clayton, Employment Lawyers) to discuss her views on the regulations.
What is IR35 and what does it mean for individuals who contract/ interim under their own company?
IR35 is a reference to an HMRC rule that seeks to tackle tax avoidance. It applies where an individual contractor supplies their services to a hirer/end-user client through an intermediary, such as their own personal service company. The contractor seeks to avoid paying employee income tax and national insurance contributions (NICs) by paying themselves in dividends.
The IR35 legislation says that if the individual contractor would be regarded as the hirer’s own employee for tax purposes had the hirer engaged them direct (rather than through their personal service company), income tax and NICs must be paid on their fees. If, on the other hand, the individual would be regarded as self-employed, they may be taxed as a self-employed person. This can be more beneficial.
Currrently, in the private sector, the contractor’s personal service company has to decide if the contractor would be the hirer’s employee for tax purposes if the hirer had engaged them direct. If it considers that it would, the personal service company must deduct income tax and national insurance contributions from the contractor’s fees before paying them. The personal service company must also pay employer NICs to HMRC.
The Government believes the legislation is being abused and so is changing it. The changes will not affect companies, organisations or businesses that engage contractors in this way if the company, organisation or business is small - the current rules will continue to apply to them. By way of example, a company will be small if it meets at least two of the following criteria:
- Annual turnover not more than £10.2 million
- Balance sheet total not more than £5.1 million
- No more than 50 employees.
When the changes for medium and large companies etc come into force in April 2020, the hirer will have to decide the contractor’s employment status for tax purposes instead of the contractor’s personal service company. If the hirer concludes that the contractor would be their employee if they employed them direct, whoever pays the contractor’s personal service company (the “fee payer”) will be responsible for deducting income tax and NICs and for paying employer NICs to HMRC. This could be the hirer but more often it will be a recruitment business in the labour supply chain.
The hirer will have provide a status determination statement to the contractor and to the party in the chain they contract with. This will confirm their view of the contractor’s employment status and the reasons for their conclusion. Each party will then have to pass the statement down the chain until it reaches the fee payer. Anyone who fails to pass on the status determination statement as required could be liable to pay tax and NICs. If the client fails to take reasonable care when making its status determination, it will be liable for income tax and NICs. HMRC will be also able to recover unpaid tax and NICs from others in the labour supply chain if a party defaults on its obligations.
Contractors will be able to dispute a status determination by making representations to the client which the client will have to consider and respond to. If the client fails to comply with the requirements of the disagreement process it will be treated as the fee payer and liable to account to HMRC for income tax and NICs.
Moving the obligation to determine employment status to the client is likely to result in more contractors being regarded as employed for tax purposes and this is HMRC’s aim. As a result, their fees will be subject to income tax and NICs.
How have the changes affected public sector workplaces and employment since their introduction?
The proposed private sector IR35 reforms have already been introduced for public sector clients engaging contractors who contract with them through their personal service company. The changes were introduced into the public sector in April 2017. They are being introduced in the private sector in April 2020.
For public sector contracts like Cross Rail or any other government contracts, the public sector end user client/hirer is now responsible for deciding the contractor’s employment status for tax purposes. Whoever pay the contractor’s personal service company must operate PAYE and pay employer NICs and the apprenticeship levy charge to HMRC. So if for example the end-user client pays an employment business which in turn pays the contractor’s personal service company, the employment business will be the fee-payer and will have to operate PAYE and pay employer NICs and the apprenticeship levy charge to HMRC. The legislation is therefore pushing the tax liability away from the individual contractor’s personal service company on to the fee-payer who then seeks to pass the increased cost on to the client.
There have been reports of public sector organisations struggling to attract and keep hold of contractors, with project costs rising as a result. Many have put delays to the Cross Rail project down to contractors leaving in droves due to being found to be within IR35. Indeed TfL itself has blamed the IR35 changes for the delay as it led to a significant number of vital contractors leaving. The changes are also thought to have contributed to the NHS staffing crisis with the number of self-employed doctors dropping by around 20,000.
Do you think there has been a shift in employment status since the introduction of the public sector IR35 reforms?
It has definitely changed the mind-set of employers. Many are now looking to see if they can increase their headcount so that they can take people on as employees and avoid having so many contractors. Many contractors have quit contracting in order to become employees instead.
Assessing a contractor’s employment status, even using HMRC’s Check Employment Status for Tax (CEST) tool can also be laborious and time-consuming. This ultimately means that companies may be reluctant to use contractors and instead prefer to take them on as employees.
Self-employed contractors are having to structure arrangements so that they are found to be genuinely in business on their own account. Key factors relevant when assessing employment status include whether the contractor has to provide the services personally, the degree of control the hirer has over the contractor, the level of financial risk undertaken by the contractor and the extent to which the contractor is integrated into the hirer’s business. For example, if the contractor is allowed to send someone else to do the work if they don’t want to do it for any reason, then they are not obliged to perform the services personally. This means they are more likely to be self-employed. The contractor will also want freedom to decide their own hours and where and how they perform the services. If the hirer controls these, the contractor is more likely to be an employee.
In your opinion, do you think the changes to the off-payroll working rules should be introduced to the private sector? Why?
There has been an abuse of the tax legislation. Having said that, it is not easy to determine a contractor’s employment status as employment status is often blurred. HMRC’s CEST tools, which anyone can use to assess employment status, has attracted a good deal of criticism for not providing accurate results. HMRC has said that it will roll out an enhanced version of CEST before April 2020 but has not done so yet.
Do you think organisations in the private sector have had enough time to prepare for the off-payroll working rules being rolled out in April 2020?
Not really. The legislation isn’t in final form yet, the enhancements to CEST have not been made and promised guidance from HMRC has not been published. Organisations that engage a lot of contractors will need to assess each one separately. The process is not easy and requires a lot of work in gathering together the requisite information to answer the CEST questions. Although using the CEST tool is not compulsory, end-user clients who answer the questions accurately will be able to rely on its results. This is therefore a good reason to use CEST.
Do you think the introduction of the amended rules into the private sector will mean a change in percentage of Limited company workers under the IR35?
I think so yes. This has already been seen in the public sector and I think we will see the same in the private sector. I think it will impact those who are on long-term assignments in companies such as in Financial Services. In fact earlier this year HSBC announced it would stop engaging limited company contractors from September 2019 in a bid to avoid the private sector IR35 reforms altogether. I expect others to follow suit.
Do you think the government has taken the right steps in defining which organisations fit into the scope of the reform?
Yes I think it’s right that smaller companies, organisations and businesses should not be caught. Using the Companies Act definition of a small company should mean that companies know whether they are caught or not. Unincorporated organisations (such as partnerships) and sole traders are only caught if turnover is £10.2 million plus.
It is important to note that some financial services and insurance firms are excluded from the “small company” definition and so the reforms will apply to them regardless.
Based on a viewpoint [from a stakeholder] that the rules should be applied to all organisations, Do you think universal application would be more effective rather than different rules based on size and other determining factors? (Administrative burden)
I would say complying with the employment legislation is already onerous / tough to deal with for small employers and we should be looking at ways to encourage setting up businesses not discouraging. So it’s right that small businesses should be excluded.
What are your views on liabilities being transferred across the Labour Supply Chain based on non-compliance? How will this affect partnered businesses i.e. client and agent?
I think it’s right that liability should be transferred. It will encourage hirers/end users and others to be more cautious about who they contract with, if they can end up being liable for the failure of others in the labour supply chain. The fact that hirers will be liable for tax and NICs if they do not carry out the employment status assessment with reasonable care will also be an incentive for them to do the assessment properly.
What are your thoughts on the CEST service? Based on non-compliance rates and a HMRC estimate of only 10% of those who should be applying the rules that are, should the HRMC be determining status?
https://www.gov.uk/guidance/check-employment-status-for-tax
Assessing employment status is not as straightforward as answering the questions on CEST. The tool is not always accurate, although HMRC says it will stand by the CEST result if the questions have been answered accurately and the arrangements were not contrived to achieve a particular result. However, the answers you have to select from may not fit your arrangements and so it can difficult to give an accurate answer. Also, in many cases the tool will state that it has not been able to determine whether the engagement is inside or outside IR35. HMRC accepts certain criticisms of CEST and says it will be releasing a ‘fit for purpose’ enhanced version in advance of the reforms in the private sector. Nevertheless it is difficult to see how the tool will ever be sophisticated enough to deal with all the different types of contractual arrangements and give an accurate answer in every case.
Is there anything else you believe the government needs to cover before the reform implementation in April 2020?
Ensuring the CEST tool is fit for purpose and helping organisations understand what they need to do to assess employment status correctly and the evidence they need to support their status assessment. HMRC should be publishing detailed guidance so everyone in the labour supply chain understand their obligations and that is needed now, not in March just before the new rules are in force – which is what happened when the reforms were introduced in the private sector.
What does the future hold for workers under the IR35 regulation?
The Government is keen to make sure that people are paying their tax properly and so tax breaks for genuinely self-employed people could end up being ‘watered down.
It is likely that many contractors will be found to be employees for tax purposes. Hirers may therefore prefer to engage them directly as workers or employees in order to avoid having to assess their status. This could result in them also getting employment protections as the employment status tests for tax and employment are similar (although not identical).
Thanks to Tina for taking the time and providing lots of insight into the legislation and the changes. You can find information on any present upcoming seminar's on our home page or can enquire with me directly isabelle.briggs@wademacdonald.com. For further information on IR35 you can visit the GOV.UK website or give one of our interim team members a call.
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