The off-payroll working rules, known more commonly as IR35,
were introduced in 2000. Their purpose is to stop independent
contractors who operate through an intermediary gaining
unfair income tax and national insurance advantages when,
in essence, they would be classed as an employee if they were
contracted directly.
Although the legislation has been around for close to two decades, HMRC has
claimed that levels of non-compliance have been high, with only 10% of those
who should be applying the rules doing so.
To combat this, HMRC introduced reforms to the public sector in 2017, which
shifted the responsibility of determining whether IR35 applies from the worker's
intermediary to the public sector body or agency paying the worker's intermediary.
Despite mixed reviews of the effectiveness of the public sector reforms, Budget
2018 announced an extension of the off-payroll working reforms to the private
sector, with the new rules applying from April 2020 (now delayed to April 2021).
Following the release of draft legislation in July 2019 as part of Finance Bill
2019-20 and accompanying guidance, there is plenty for accountants and
their clients to unpack in the run-up to 2020.
This guide highlights key points from the guidance.
From 6 April 2021, medium and large private sector organisations
will be responsible for assessing the employment status of
individuals who provide services to them through an
intermediary, typically a Personal Service Company (PSC).
Where an individual is considered to be a disguised employee within the scope
of IR35, the entity that pays the contractor's intermediary (the "fee-payer") will
be responsible for withholding tax and National Insurance Contributions (NICs).
Typically, the fee-payer is likely to be the client or an agency.
It's worth noting that, while the reforms essentially change who the responsible
party is for determining IR35 status (shifting responsibility for determination from
the contractor's PSC to the end client) the underlying IR35 legislation has not
changed as a result of these reforms.
While medium and large-sized organisations, agencies, and
contractors that operate through a PSC will have to consider
the implications of the new legislation, small organisations are
exempt from the new rules.
The draft legislation uses the Companies Act definition of small, where an entity
is considered small if two or more of the following conditions are met:
Annual turnover not more than £10.2 million;
Balance sheet total not more than £5.1 million;
Not more than 50 employees.
Unincorporated organisations will be considered small where turnover does not
exceed £10.2 million.
Where an organisation is exempt from applying the new rules, the existing IR35
procedure will apply (i.e. it will remain the responsibility of the PSC to make an
IR35 determination).
As part of the reforms, medium and large organisations should
provide a worker with a Status Determination Statement (SDS) which
outlines both the decision reached by the organisation as to the
worker's employment status as well as the reasons behind the decision.
The worker should also pass on the SDS to the agency or other organisation the
worker contracts with until the SDS reaches the party immediately above the
worker's intermediary, who is classed as the fee-payer or deemed employer.
A fee-payer must be resident in the UK or have a place of business in the UK.
Crucially, if a party in the labour supply chain fails to pass the SDS to the next
relevant party, then that entity will become the fee-payer.
A fee-payer is responsible for calculating the deemed direct payment, which
accounts for employment taxes and NIC associated with the contract.
The fee-payer should withhold the relevant employment taxes and employee NIC
from the payment to the worker's PSC and also pay employer NIC. These amounts
should then be reported to HMRC through the Real Time Information (RTI) system.
Notably, the employment allowance cannot be used against deemed employee payments.
If a worker or deemed employer disagrees with an SDS, a client-led appeal process is
available. As the legislation stands, clients will have 45 days to respond to a worker
or deemed employer where a status determination has been challenged, either to
inform them that the client's initial determination has been reviewed and is deemed
correct or to issue a new SDS.
The draft legislation has been subject to a fair amount of criticism,
with major accountancy and tax bodies, including the ICAEW
and GOT, highlighting issues with the draft legislation and
accompanying guidance, such as:
Lack of clarity over status determinations
As small organisations are exempt from the new rules, the responsibility for making
status determinations remains with the worker.
However, as small organisations are not required to notify contractors that they are
small, this could cause confusion for workers, who may not be aware that the onus
remains with them to determine the IR35 status of an engagement.
Additionally, the client-led disagreement process over an SDS determination has
been criticised, with both the CIOT and ICAEW highlighting that the legislation
does not place any time limit on when a worker or deemed employer can object
to an SDS determination.
This means, in theory, years could pass before any objection is raised, which could
lead to increased uncertainty for clients.
Ongoing issues with CEST
It's no secret that the IR35 legislation can be difficult to navigate at the best of
times, as an IR35 determination is often subjective and dependent on the specific
circumstances of a contractor's engagement with a client.
HMRC's recent high-profile IR35 cases in the courts, such as Lorraine Kelly, have only
further highlighted the complexity of this area of legislation.
To assist relevant stakeholders, HMRC introduced a Check Employment Status for
Tax (CEST) tool that workers, engagers, and agencies can use to see whether HMRC
considers an engagement to fall within the scope of IR35.
As HMRC has stated that it will stand by the results given by CEST unless the
information provided isn't accurate, it is likely to be relied on by many organisations
when making a status determination.
However, CEST in its current form is flawed and does not consider fundamental
tests when determining employment status, including the Mutuality of Obligation
(M00). What's more, in a significant minority of cases CEST cannot even make an
employment status determination.
HMRC has stated that an improved CEST should be available for use later in 2019,
but, without seeing the new tool, it's hard to say whether it will be reliable enough
when assessing contracts impacted by the April 2020 changes.
The power to transfer PAYE liabilities
One of the more controversial aspects of the draft legislation is section 688AA,
which would, by means of secondary legislation, permit HMRC to recover PAYE
liabilities from other entities in the labour supply chain in cases of non-compliance.
This could create a situation where, even if a client or agency had taken all
reasonable steps to comply with the new rules, they could still face a PAYE liability
if non-compliance is found elsewhere in the chain.
