With all the buzz in the industry about the upcoming reform to the off payroll working rules, otherwise known as IR35, we wanted to offer you the chance to fully understand the new reform as we map out a clear view of the proposed changes, how they might affect you and the challenges that businesses will face in the short and long term.
You will be aware that the changes to the off-payroll rules were due to come into effect on 6th April 2020. This was delayed until 6th April 2021 because of the spread of the coronavirus (COVID-19) pandemic. The delay was to help businesses and individuals deal with the economic impact of COVID-19.
Sam Pascoe is a Commercial Director at Liquid Friday, with over 18 years’ experience in the commercial sector, 12 of which at Director level. Sam believes as a service provider, we need to consistently exceed customer expectations and develop positive relationships to produce mutually beneficial business growth.
Liquid Friday employ workers with a wide range of specialist skills and experience, for use by third parties on temporary assignments and projects. They look after 6,000+ contractors in various sectors and work with over 150 national, regional independent agencies and clients, including JLR, Bombardier, Siemens, Gemini, Lloyds, XPO and River Island.
Whether you’re a Client or a Contractor it is essential to be familiar with IR35. IR35 only applies to workers operating through limited companies, also called Personal Service Companies or PSCs. It does not apply to umbrella company workers, direct employees on PAYE payrolls, or self-employed CIS/sole traders.
IR35 is a piece of tax legislation designed to combat tax avoidance from what HMRC sees as “disguised employment” by individuals supplying services through limited companies. In the eyes of HMRC, if someone is doing the same work, in the same place, in the same way as an employee, they should be taxed as an employee…
“The legislation aims to eliminate the avoidance of tax and National Insurance Contributions (NICs) through the use of Intermediaries, such as Personal Service Companies or partnerships, in circumstances where an individual worker would otherwise, for tax purposes, be regarded an employee of the client”. - HMRC
It is important to stress that IR35 status applies to the Contract or Assignment basis, not the individual worker. If an assignment is classed as inside IR35, the income paid to the limited company will be subject to PAYE tax and National Insurance deductions, like a normal employee.
If an assignment is classed as outside IR35, gross payments are made as reflective of all B2B relationships.
There are two main factors that drive IR35 status:
An example of this is with the US Company, Uber: They had a well-written contract to demonstrate that Uber drivers were self-employed, but the reality of the working practice looked very different, it is argued that it looked like employment. Uber has been undergoing a 5-year legal battle to show their contract is fair and accurate, however, the UK Supreme Court has ruled that Uber drivers are in fact workers and not self-employed. The decision means thousands of Uber drivers are set to be entitled to minimum wage and holiday pay, meaning Uber have to pay over 100 million pounds to Uber Drivers. This ruling does not apply to all drivers as Uber made changes to their contracts in 2016, but still enough drivers to make a massive dent in Uber's wallet.
IR35 came into play in 2016, but the knock-on effects were not prevalent until 2017. For a contract to be classified as caught by IR35, the tests must indicate an employment relationship in all three areas listed below; Mutuality of Obligation, Substitution and Control.
Is the client obliged to offer work and is the worker obliged to take it?
The basic requirements as to the mutual obligations necessary to determine whether there is a contract in existence at all are:
For example, an employee is paid by their employer each week or month and, within the bounds of job descriptions, can be asked to undertake tasks across a spectrum of activities that go beyond their core role. HMRC believe if a contractor is engaged through an agency when there is a contract to deliver a service to the end client this is a mutuality of obligation.
However, genuine limited company contractors outside IR35 should neither expect nor receive such mutuality of obligation. Contractors will perform a specific task for a specific project, and once the project is over the contractor moves on or may be offered a new project by the client.
Is the personal service of the worker required, or can they send a substitute?
Substitution clause is a section within a contract of a self-employed worker, to their clients, outlining their right to provide an alternate person or persons to carry out the work that they have been contracted to do if needed. This could be for reasons including illness, family emergencies, holidays etc.
The contractor cannot be seen to be providing a "personal service" if they are to be classified outside of IR35. If the client asks for a certain contractor to personally provide the services and will not accept the services to be delivered by another qualified individual, this would diminish the purpose of the client engaging the limited company from the start, but rather the individual; HMRC could argue at this point that the individual is better off being employed directly by the client and should be taxed in the same way as an employee.
What degree of control does the client have over how, when and where the work is completed?
An example of this is if someone’s boiler broke and they needed a heating engineer. If the engineer is outside of IR35, they will come to look at the damage and book to get it sorted out on Monday and then send someone to fix it. We then do not have any control over how the worker works, when he turns up to complete the work, or when he takes a break- as long as the job is completed. After it has been fixed, there is now a leak, so the company needs to send someone out again to come back to sort it out, at his own time and cost. This process shows ‘outside of IR35 status’: No control over when, how much it cost, and no limitations. So therefore, is it genuine b2b or is it a personal service?
End clients no longer engaging LTD contractors, going to do a blanket ban. After 6th April, they must comply with new legislation, with companies such as Vodafone, Microsoft, rolls Royce and BP. Reason being because of the risk and responsibility: Lloyds and XPO send letters out to their contractors and said to you want to keep with us or not, which was kind of bad.
Currently, there are two sets of rules in play. Historically, the individual director of the limited company carried the responsibility for determining the IR35 status of their contracts. By agreeing to and signing-off annual company accounts and corporation tax returns for their Personal Limited Company, the individual gave a presumed declaration that they had operated outside of IR35.
Likewise, in the event of an IR35 investigation by HMRC, where they found that the determination was incorrect, the individual was liable for any underpaid Tax, National Insurance, and penalties.
HMRC took the view that only a small number of limited company contractors were correctly classifying themselves as operating outside of IR35, and as a result, the treasury is missing out on a considerable amount of tax revenue.
From April 2021, for contractors engaged in the private sector, responsibility for determining the IR35 status switches from the individual contracting company to the client. This has already happened in the public sector from April 2017.
If the client decides that the contract is within IR35, then the party paying the Personal Service Company – the “fee-payer” – must tax the contractor at source and pay relevant employment costs (NIERS & App Levy), exactly as they would an employee on their payroll.
HMRC will try to establish whether the relationship is one of employment or one of B2B services.
HMRC’s tool is designed to assist workers, client’s and other relevant parties to ensure that a contracts IR35 status is correctly determined. CEST uses a series of questions to determine whether the worker is employed or self-employed for tax purposes.
HMRC have said that CEST is the only IR35 decision-making tool they will stand by. However, it is worth noting that they also state that use of CEST is not compulsory, nor do they have a formal appeal process if you think an outcome has been determined incorrectly.
For more information on IR35 and how it may affect you, look on the government website.
We’ve got plenty more fantastic industry experts lined up for 2021 to take part in our webinar series. If you’d like to find out more or to get involved as a speaker yourself then please get in touch with Robert Taylor.