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The Countdown to IR35 3.0
4th November, 2019
The Countdown to IR35 3.0
IR35 and the supply chain
Assuming the current Finance Bill gets through parliament, we are now a little over 6 months away from the implementation of the reform of the off payroll working rules, commonly identified as IR35.
The off-payroll rules as amended in April 2017 will be extended from the public sector to all but the smallest companies in the private sector, with all payments made on or after 6th April 2020 being caught by the new legislation.
For all contractors working through their own limited company, the responsibility for determining whether the rules apply now shifts from the contractor to the end client. For those caught by the rules, the end client will now become liable for the payment of employer’s national insurance and apprenticeship levy contributions, a combined 14.3% on top of the contract fee they currently pay.
In addition, the fee payer, identified as the intermediary who pays the contractor will now become responsible for calculating the deemed employment payment and deducting tax and national insurance from the fee they pay to the contractor.
The end result being, where a contractor has been deemed to be a disguised employee, they and their hiring organisation will be taxed as if they were an employee, delivering increased costs for the end client and a lower take home pay for the contractor.
This, unsurprisingly, has caused alarm throughout the entire supply chain now affected by the new rules.
But rules are rules, so we must now consider how we adapt to these changes, as those that don’t will suffer. All parties in the supply chain must now work together to identify those affected.
Do the rules apply?
The end client must now take responsibility and reasonable care for making the assessment as to whether the contractor is caught by the rules, often referred to as ‘Inside IR35’. Their decision must be reached on a case by case basis and issued as a Status Determination Statement to those parties in the supply chain, including the contractor.
This important decision will also determine whether the fee payer, typically the recruitment agency closest to the contractor, will need to operate payroll calculations on the payments they make.
It’s all about the assessment
The rules are very complex and there has been significant criticism of HMRC’s CEST tool for checking an individual’s employment status. As it stands, the tool fails to meet the key test of reasonable care and will fail the new legislation.
Regardless, end clients and their agencies should not rely on automated tools alone. They should engage tax and legal specialists who understand case law and the dynamics of the supply chain.
For those caught by IR35
Unless contractors fancy a trip to the tribunal, there will be no mechanism to overturn a decision. Whilst there will be an appeal process, if the end client says the contractor is ‘inside’, the rules will apply, and taxes will become due.
With this outcome, contractors and their end clients will need to communicate and find a way forward.
In the first instance contractors may not want to stay on the same assignment for fear of retrospective action being taken against their own assessment. Here we are likely to see a game of musical chairs as contractors look to distance themselves away from their current engagement in search of a new gig that is ‘outside’ the rules.
For those that stay, if they are deemed mission critical, there could be a renegotiation of rates to offset the reduction in take home pay.
On the flip side those identified as more dispensable, could see their contract terminated and re-offered at a lower rate to offset the employer related costs.
Change of employment solution
Beyond the direct financial impact of being caught inside the rules, contractors will see little point or incentive in maintaining a limited company. Likewise, end clients and fee payers will not want the burden and responsibility for calculating, reporting and paying the employment taxes due.
The choice for many will either be to go permanent, an outcome both parties are unlikely to want; to go on the agency’s payroll, again an outcome that many won’t want; or to operate via a payroll umbrella.
Operating via an umbrella will simplify the process for all parties. The umbrella will assume the responsibility for employing and paying the contractor. In this scenario the new off payroll rules will not apply, as the contractors limited company has been removed from the equation. Of course, there may still need to be a negotiation in rates, but overall it represents a better outcome for all parties in the supply chain.
The end client and fee payer can dispense with their responsibilities of calculating, reporting and paying employment taxes; and the contractor can close their limited company and take some control and benefit from being employed through an umbrella.
Most notably, the contractor will now receive employment rights, access to statutory payments, such as sick pay, maternity pay, etc.
For those that haven’t given the forthcoming changes much thought, now is the time to act. Start the conversation and take advice.
With in-house expertise on IR35, the Contractor Co-op will work with all parties to help make the correct decision when applying the off-payroll rules.
For those caught, the Contractor Co-op offers an umbrella payroll service, accredited and approved by Professional Passport and APSCo.
For more information, please contact Chris Mattingly on 020 3468 0009, or visit contractor.coop
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