For some contractors and organisations using contractors, tax changes due in from 6 April 2020 amending the “off-payroll working” or “IR35” procedures will have a big impact, and the consequences of getting it wrong could be costly.
The changes coming in move the responsibility for determining whether contractor workers (Contractors) should be taxed as employees, onto the end user of the services (Client). They also impose the obligation to operate PAYE and NIC on the person paying the fee for the services to the Contractor’s intermediary (see further below), rather than leaving it to the discretion of the Contractor/intermediary.
Theoretically there is no change to who the IR35 rules impact as consequence of the 6 April 2020 changes; it is just a change in procedure, passing the obligation to decide whether someone has employment tax status from the Contractor to the Client. If the Client fails to take reasonable care in making the determination, then the Contractor’s tax and NIC liability is the liability of the Client. The Client can only pass this liability to the next person in the chain (an intermediary) if they issue a reasoned determination.
The key amendment therefore to IR35 legislation is that clients who engage self-employed contractors through intermediaries such as personal service companies (PSCs) will now be required to issue an IR35 status determination statement (SDS) before a contract begins. An SDS is a comprehensive statement which is to be made by the engager following an IR35 assessment. It declares a contractor’s deemed employment status together with the reasons behind reaching this conclusion. From 6 April 2020, an SDS is to be completed for each new PSC engagement and each existing PSC engagement due to receive a payment after this date.
The requirement to issue a SDS for each Contractor only impacts medium/large businesses. A business is medium / large if two of the following are met:
- generate more than £10.2 million revenue per year;
- have more than £5.1 million of assets; and/or
- have more than 50 employees.
Clients who are small businesses will not be required to issue determinations (at least not yet).
The new procedure will not impact employment agencies or umbrella companies where the Contractor is already subject to PAYE and NIC.
Once a Client issues a reasoned determination in writing, the liability to operate PAYE and NICs in respect of payments to the Contractor passes to the next person in the supply chain between the Contractor and the Client. The determination must be issued by the Client both directly to the Contractor performing the services and to the person that is providing the Consultant’s services to the Client (the intermediary).
There may be more than one intermediary in a chain of labour supply, and as such the obligation to operate PAYE and NIC can be passed down the chain until it gets to the person that is paying the fee to the intermediary.
So what do you need to consider when producing a determination?
At a minimum it must meet the following basic criteria:
- Be in writing (an email will suffice).
- Identify all the parties in the supply chain, providing names and addresses and description of role in the supply chain (eg Contractor’s personal service company, recruitment agency).
- Start with the finding of the determination: within IR35 or not.
- Contain a reasoned argument for why the determination outcome.
- Provide details of process to appeal the determination outcome (and respond within 45 days).
The reasoned argument for why the determination outcome has been selected should ideally consider the following criteria:
- Degree of control (how, what, where and when);
- Whether there is any mutual obligation to be offered work / to accept work;
- Where does the financial risk of failure for not delivering the work lie?
- Whether the Contractor will be “part and parcel” of the Client’s business (this has a social inclusion aspect).
- Who is providing the equipment to be used by the Contractor?
- Is there external evidence that the Contractor is in business on their own account?
- What is the intention of the parties?
This process should be undertaken at least once a year (to consider any changes in the nature of the work) if a Client is going to argue that they have been reasonable in producing their determinations.
HMRC do have an online tool to assist in the determination (called CEST). However, it is arguably heavily biased in favour of employment status and as such Clients could be vulnerable to being challenged by Contractors as having not undertaken a reasonable assessment. CEST has also been reported to have produced incorrect results (at odds with case law) and in about 15% of the cases does not give definitive answers.
We can assist a Client company in determining what status to attribute to a Contractor and prepare determinations with clear reasoning for the decision to risk the minimise of challenge by Contractors. We can also assist Contractors and intermediaries in the negotiation of contract terms to minimise the risk of receiving a positive employee SDS.