The IR35 tax legislation was introduced as a means of distinguishing between employees and self-employed contractors. At La Fosse, we've been following the development of this government legislation closely, and have taken advice from several sources on the matter, including APSCo, employment and tax lawyers, all the way through to individual contractors and other recruitment companies.
What is IR35?
IR35 (or the Intermediaries Legislation) is intended to combat incorrect payment of tax by workers supplying services to clients via an intermediary (through a limited company, for example), where the relationship with the client would be that of an employee were it not for the fact that there is an intermediary in place. In such a case, the worker should pay tax on a PAYE basis, as an employee does.
How is an IR35 determination decided?
There are many factors which can determine whether you are inside or outside IR35. It's not always dependent on what's written into your contract, but more on what happens in working practice.
Take, for example, a builder who you've contracted to build an extension on a house. There are certain constraints on their work, such as where you'd like to extension built and their obligation to carry out the work at certain hours of the day, but otherwise, it’s down to the builder as to how the work is done. It's also possible for them to send a replacement builder to complete the work, which you wouldn't mind, providing the work is completed on time and to specification. They also have no obligation to accept further projects from you, nor do you have to offer any.
By contrast, employees, or those deemed to be employees, are usually required to turn up to a certain location, work within certain hours, and are directed by their manager on how the work should be completed. Once a task or project is finished, they'll expect another one to complete and the employer will expect them to continue working.
When does the new IR35 legislation for the private sector come into place?
From 6 April 2021, how the rules are applied will change.
If you are a worker and your client is in the public sector, it’s their responsibility to decide your employment status. You should be told of their decision.
If you are a worker and your client is in the private sector, it’s your intermediary’s responsibility to decide your own employment status for each contract. The private sector also includes third sector organisations, such as certain charities and community organisations.
All public sector authorities and medium and large-sized private sector clients will be responsible for deciding if the rules apply to their workers, and as such, if they are within the scope of IR35 or not.
If a worker provides services to a small client in the private sector, the worker’s intermediary will remain responsible for deciding the worker’s employment status and whether the rules and subsequent IR35 status apply.
Who will be affected by IR35?
You may be affected by these rules if you are:
A worker who provides their services through a UK-based intermediary
A client who receives services from a worker through a UK-based intermediary
An agency providing workers’ services through a UK-based intermediary
What if I think my assignment is outside, but my client or agency thinks it's inside IR35?
The responsibility for making this assessment will sit with the person making the payment; either the client or the agency (or often a combination of the two). It is their decision, not the worker's.
How will I know if my contract is within the scope of IR35?
Status should be decided on a case-by-case basis and there will be no "blanket assessments" made across a client, role, or agency contract. La Fosse have partnered with a leading provider to build a comprehensive tool which ensures maximum accuracy when assessing each case.
The legislation requires both the end client and the contractor to complete these questions in relation to each new assignment. These questions must be answered accurately and with reasonable care, and it will be La Fosse's responsibility (as the fee payer) to ensure compliance.
What happens if I'm deemed inside, and what are my options?
If your status is deemed to be within the scope of the regulations, you'll need to pay tax and NI contributions as if you were employed. La Fosse will work with you on this to help decide the best solution going forward.
Will IR35 affect me if I work through an umbrella company?
If you're already contracting via an umbrella company, you will not be affected by IR35, as you will already be taxed under PAYE.
La Fosse hold a PSL list of recommended umbrella companies - please get in touch if you require this.
After 6th April 2021, the off-payroll working rules in the private sector will change - IR35 legislation will be implemented, and your working practices will be reviewed. Instead of you being responsible for determining IR35 status, this obligation has been handed to the engager of each contractor, i.e. the client. The client will complete an online assessment using a comprehensive tool we have built under the guidance of a leading provider.
If you are deemed to be inside IR35, this means that by HMRC's metrics, how you perform your current job is similar to that of an employee, and therefore you should be paying the same amount of tax. As such, from April, how you pay your tax and National Insurance contributions will be affected. If you have been operating as a PSC contractor, you will now be subject to different processes.
At La Fosse, there are two distinct options to choose from, in order to continue working with your client and ensuring your tax and NI deductions are calculated appropriately.
Option 1 - Using an umbrella company
If you choose to work with an umbrella company, they will deduct your NI and tax on your behalf then pay you for the remainder, which is approximately 60% of your take-home pay.
At La Fosse, we only work with accredited umbrella companies. This is to ensure that we know for certain that they are compliant with the latest
HMRC regulations and in line with the Criminal Finances Act 2017. There are over 200 accredited umbrella companies you can choose from, all of
which have been certified by the relevant professional bodies: FCSA, APSCO, PRISM and Professional Passport.
Do not be tempted by umbrella companies offering you 70-90% take-home pay. They are offering these services illegally and HMRC are in process of
closing these companies down.
We have compiled a PSL of recommended umbrella companies that are fully vetted and accredited - the majority currently work with us, and you can rest assured that they all hold the same high levels of good customer serve and culture as we do. Please get in touch if you require access to this list.
Option 2 - Using an IR35 fee payer solution
Similar to how an umbrella company works, a fee payer solution will take responsibility of your NI and tax deductions whilst still allowing you to continue contracting via your limited company. La Fosse has partnered with a leading provider to offer an easy-to-use service to our contractors, which includes personal access to an online portal to view invoices and remittances.
It is a good idea to start preparing for the new legislation by assessing your contractor base. We have developed a comprehensive tool under the guidance of a leading provider to help engagers assess their workers' status and determine next steps regarding employment and procedure going forward. You should do this on a case-by-case basis and not take a 'blanket approach' if you have numerous contractors.
How we help you
La Fosse are committed to:
Partnering with our current clients to assess contractors using our bespoke tool
Offering solutions for contractors deemed to be inside IR35
Supporting you so you have a compliant supply chain
Advising on best practice
Educating the hiring community
What happens after April 2021?
Given the reliance of many businesses on contractors, when you're giving the agency the job specification, it will be your responsibility to inform them whether the role sits inside or outside IR35 legislation.
After 6th April 2021, you will need to assess any new contractor you wish to bring on by answering a series of questions regarding their working practices. Please answer honestly and accurately. It is also advisable to begin assessing any current contractors you have that will still be on site after April 2021.
Is your business exempt?
The Government has stated that it intends to use 'similar criteria' as those found in the Companies Act 2006 to define a small business. If this is the case, responsibility for determining the IR35 status of a contract remains with the PSC and the changes do not apply.
The Act says that a company will be regarded as small if it has two or more of the following features:
Turnover of £10.2m or less
£5.1m or less on its balance sheet
50 employees or less
Where does liability for IR35 lie – who is responsible?
The primary liability lies with the fee-payer: the entity that pays the personal service company (PSC) that the contractor works under. This means that if the contractor’s status were to be questioned by HMRC, the end user would be liable to pay any outstanding tax themselves.
However, this is not always the case. If the fee-payer does not receive a status determination statement from the end user, declaring whether the contractor sits inside or outside of IR35, the end user becomes liable. In addition, the end user is also viable if they issue a statement determination of ‘outside’ but have not taken reasonable care to ensure this is an accurate judgement and this is later challenged by HMRC.
A final important clause to note, something clarified in the January draft of the new ruling, is that even if end users do everything by the book, but the fee payer can’t or doesn’t pay the outstanding tax within a reasonable amount of time, they again become liable as HMRC’s last resort. This clause has caused a lot of large end users to steer away from PSCs altogether.
What happens if a contractor disagrees with a PSC’s decision?
Many contractors are concerned about being wrongly placed inside IR35, and the subsequent earnings loss that comes as a result. As such, the contractor and the fee payer are permitted to request reasoning from the end user if they are deemed to be inside of IR35 but are unsure of why or disagree with the result. If the end user neglects to provide an explanation within 45 days, liability again falls to them.
As an end user, it is important to set a precedent of employing a level of diligence when determining contractors’ statuses. This can then be called upon if required. Some organisations are refusing to recognise individual cases, but there is some risk to this as they may lose some of their contractor population.
What steps can businesses take to minimise risk?
It’s crucial that end-user businesses consider how much risk they want to take on board when working with contractors. This ‘risk appetite’ tends to vary per industry – more agile, fintech organisations may take a high-risk approach due to a fast-moving talent pool, whereas more established organisations such as banks and some pharmaceutical companies may opt for a blanket approach. As the current legislation stands, blanket assessing all contractors as inside is a legally acceptable move, however the end user must consider the high risk of losing their best talent to competitors if they do not take care in their determination status.
After deciding a risk appetite, the next step is to set up a governing structure that is prepared to present evidence for reasonable care if questioned. It’s vital to consider all environments and departments within the company, setting (preferably automated) processes in place to ensure that any potential HMRC Treasury checks can be met by solid evidence, backed by a robust programme and platform.
Most importantly, it’s all about communication. Understand your stakeholders’ positions and inform them on the process. Ensure hiring managers work diligently and don’t try to gamify the solution, as this could lead to legal ramifications. Finally, aim to get contractors through the process as quickly as possible to allow time for arbitration and discussion.
What other solutions are there?
Increasing numbers of businesses (such as banks, telecoms and life sciences firms) are choosing to take IR35 out of the equation completely and forgo PSCs by switching to a PAYE solution. This negates the need for status determinations as IR35 is irrelevant to the supply. There is some uncertainty as to how this will play out in the long run, but for businesses with a high number of contractors, this is an effective short-term de-risking solution.
What are the other risks faced by businesses?
Although businesses using a blanket approach can de-risk from a client perspective, they are likely to still face increased costs associated with this. This then turns into a supply and demand issue – companies with lots of employees need to decide how business-critical each contractor is. The least risky move in a lot of cases is to go down a PAYE route and increase rates to ensure the net pay for business-critical contractors stays the same and they are less likely to walk away from the company. Daniel suggests that end users split their contractors into three categories or ‘buckets’:
Absolutely essential contractors – what do we need to increase rates to in order to keep them happy? This generally applies to around 10-15% of contractors but can vary from business to business.
‘Nice-to-have’ contractors – meet halfway and increase the employer’s NI but let them pick up their PAYE and employee’s NI
Non-essential contractors – make no compromises on rates and let them take the full hit or decide to terminate their employment in order to recoup costs
In the public sector, there were no ‘teeth’ going further up the supply chain, however in the private sector, this is not the case – people at all levels are liable. This is fortunate as it ensures everyone has a vested interest in driving change.
Many companies are also choosing to slightly amend their essential contactors’ terms of engagement in order to place them squarely outside of IR35, thereby taking pressure off budgets. Companies with this flexibility can use this to protect themselves in terms of both budget and retention.
Above all else, it’s important to strike a balance between compliance and over-complicating risk assessment. In some large corporations, the risk related to IR35 is being assessed by a tax director who manages the firm’s reputation with HMRC, however this is not always necessary and often means the business gets left behind. If companies are taking reasonable care to justify that contractors are outside, there is a low chance of HMRC questioning the decision.
If you’re working with a recruiter or staffing company who are setting deliverables and providing staff on a statement of work basis, are you de-risked as a business?
Yes, but be careful what you wish for. Not all consultancies are vigilant enough; less sophisticated staffing agencies may just be keen to find a solution as quickly and easily as possible. As the end client, it is your responsibility to do your research first. Ensure that any consultancy you work with ensure that instead of simply re-packaging their supply of people as a statement of work, they take time and care to deliver services, take the risk for these services, get professional indemnity insurance, and appoint an expert project manager, among other processes. As the end client, it is your responsibility to do your research first if you choose to use a consultancy.
Our experts advise companies ‘hedge your bets’ and issue an SDS in collaboration with the consultancy in order to de-risk yourself.
There are still grey areas, however. The new law exempts small businesses from IR35, and as such, some people have identified a ‘silver bullet’ which allows them to create their own small consultancy firm and fly under the radar.
As defined by the Companies Act 2006, a small business is one which means meeting two or more of the following criteria:
Annual turnover is no more than £10.2 million
Balance sheet total is no more than £5.1 million
No more than 50 employees
Where the end client meets two or more of these criteria, responsibility for determining the IR35 status of a contract remains with the PSC and the changes do not apply.
In addition to IR35, which concerns itself with identifying ‘disguised employees’, there is also another piece of legislation: Managed Service Company Legislation – regardless of whether people are genuinely self-employed or not, if they set up a small company to provide services that has the hallmarks of a managed service company, anybody who interacts with them is still liable.
How do I assess clearly and fairly?
First and foremost, make sure you’ve got the data you need, and make sure you’ve got it right.
Have access to the contract, or if you’re using an external organisation such as a consultancy, at least understand the questions that need to be asked (that your hiring managers may not have access to). Questions tend to be split between generic ('what are the contracted working hours?') and esoteric (does the contract have the right of substitution, place of work, etc.?)
Step through the process and understand who will answer each part of the question
Use a CEST tool or an insured and perhaps more detailed derivative (La Fosse have our own insured tool for this – please get in touch if you’re one of our clients)
If, as an end user, you start the assessment process and don’t know the answer to a question, be sure to annotate with comments and concerns and take this to the necessary third party to get them validated.
How accurate is the CEST tool?
The CEST tool is not faultless – it overplays some aspects and underplays others. It’s a good tool to use for easy determinations, but for more technical roles, it cannot always give a clear answer.
It is not advised to try to ‘game’ the tool in order to receive a desired result; our experts note that if a case were to go to a tribunal, the CEST tool would likely not be the ultimate decision-maker.
Some cases are easier than others. Once you’ve assessed your contractors using the CEST tool, there may be some that clearly sit inside, so there isn’t much point in investing in other tools. There may also be a few contractors that clearly sit outside.
Unfortunately, the largest portion of consultants will likely sit in the grey area in the middle. Employers could possibly use a back-up tool in addition to the CEST tool – this may be expensive, but contractors may in fact be willing to pay for this themselves as they have a stake in the output.
Alternatively, with a sophisticated internal infrastructure and legal support, employers could select some ‘grey-area’ contractors to go through more complex tools, before establishing a process which fulfils the requirement of taking reasonable care and can be used in any future cases. This could be particularly useful for businesses with contractors in ambiguous roles that require a more nuanced analysis than the CEST tool can provide.
Large accountancy firms are assisting large corporations and consultancies in developing bespoke testing tools. If a company chooses to use one of the ‘big four’ accountancy companies for advice, however, they must be wary – if a small staffing company or consultancy is in competition with the accountancy firm, there could be a possible conflict of interest. It’s best to look for a commercially aware, ‘non-compromised supplier’ in this case.
All things considered, determination for IT and change contractors is primarily dependent on control, integration, and risk.
Control: If the contractor will not listen to someone telling them how to do their job, thereby taking the risk of not being paid, the employer does not have control and the contractor is likely to be ‘outside’.
Integration: The real test that employers must ask themselves is: ‘Do I care who turns up?’ The right to occasional substitution does not defeat IR35, but if continuous substitution would impact the employer, the contractor is very likely to sit inside of IR35. Other indications of being inside is if the contractor has a line manager who they report back to, although this is not a steadfast rule.
Risk: If a tribunal judge hears that a contractor has a risk of not being paid if they don’t deliver to an appropriate specification, they are likely to be ‘outside’.
Tenure also plays a part. If someone has been in the business for a long time as a contractor (generally 2yrs+), there is an expectation that there is a greater risk. However, if a contractor can evidence that they have had multiple clients within a 12-month period, there is a substantial amount of weight to support the fact that they are outside of IR35.
What steps should I take for new teams that will be created after the legislation?
Review all contracts and ensure that they are reflective of the new legislation.
Ensure that the onboarding process includes due diligence measures such as background and credit checks, as well as a CEST tool process.
What do businesses need to do to ensure compliance by 6th April?
Make sure that you have engaged with your tax inspector – this shows that you’re taking this seriously. You will be invited to fill out a questionnaire and have a non-committal conversation regarding the steps you’ve taken and what’s next.
Make sure you leave enough time to put all contractors through an assessment and make a status determination.
Look at when invoices are paid, not when their contract ends. If a contractor is doing work in March, they will likely be paid in April, and therefore everything in their current March pay period needs to have an IR35 assessment applied to it. This can be avoided through an accelerated payment, but it can be time-consuming.
For more information on these changes, how IR35 is assessed, and what the new legislation means for your business, please don't hesitate to get in touch.
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