IR35 is a legislative instrument used by HMRC to identify disguised employment status and counter tax avoidance by identifying and targeting contingent workers who operate like an employee.
From the 6th April 2021, when a contingent worker is considered to be inside IR35:
The ‘fee payer’ (agency) must pay employer’s National Insurance on top of the agreed rate
The fee payer must deduct income tax and National Insurance from the worker’s pay rate via PAYE
The end user is now responsible for assessing the IR35 status of their contingent workforce and providing a status determination to the worker and known entities within the supply chain
The end user and agency can be liable for unpaid tax, penalties and interest if they haven’t demonstrated “reasonable care” during the assessment
Prior to the legislation coming into effect, your the consultant would determine your own IR35 status. However, from April 2021, this responsibility will shift to the end user (the client). All in the chain need to show ‘reasonable care’.
Several elements need to be considered, the three key elements being Control, Personal Service (Substitution) and Mutuality of Obligation. Many clients are using the government CEST Tool to make a determination which can be found here.
Many of our clients have also partnered with Qdos to ensure ‘reasonable care’ an independent IR35 consultancy. Which we like as it gives you the Consultant/PSC the ability to be more involved in the determination.
Reasonable care was added to the legislation before the reform to the Public Sector rules in 2017. It was to prevent clients making blanket determinations and to mitigate the risk of incorrect determinations being provided. (this still happens and is the clients decision to do so)
Reasonable care hasn’t been properly defined however it is sensible that clients do the following:
Ensure all of your hiring managers are trained on the new rules and how to apply them
Have a well-documented determination process
Make a determination on each individual assignment/contractor rather than blanket determinations
Setup an IR35 working group internally who can assist with making determinations
Ensure that the relevant contractor is consulted when making determinations so that you can see the full picture.
If the end client determines a contingent worker’s IR35 status incorrectly, it will be extremely costly to the organisation.
If a worker is wrongly deemed as outside IR35, HMRC may launch an investigation. This could lead to back taxes, penalties and interest. If a worker is wrongly deemed as inside IR35, as demonstrated with the public sector reforms, workers are likely to increase their rates or abandon projects when they don’t feel the assessment was fair. The end user must set up a process that allows contingent workers to challenge decisions.
With both decisions, the end user needs to demonstrate “reasonable care” when making status determinations. If the end client has shown ‘reasonable care’ they could find themselves liable to penalties from HMRC.
HMRC has developed a basic online tool, CEST, to help the end user assess whether an individual is inside or outside IR35. While it can deliver a result within minutes, it has been heavily criticised as it’s provided incorrect IR35 decisions in existing IR35 court cases.
To show further ‘reasonable care’, we’ve partnered with several legal experts to undertake all IR35 assessments. Not only will this ensure all contingent workers have the correct IR35 status, it also leaves an audit trail of the outcome and supporting documents. They’ll also be on hand to provide legal advice and best practice moving forwards.
If you the contractor/worker disagrees with the determination you are able to appeal through a new client-led disagreement process and the end client will have 45 days to reply. If the end client stands by their initial determination then they will have to provide the reasoning behind it. If they agree it was incorrect, they can provide a new Status Determination Statement.
A blanket assessment is where the Client predetermines an IR35 status decision without conducting
an individual assessment and instead basing the decision solely on job description or role. Although we do not agree that this is a ‘reasonable’ approach, Clients have and will be making blanket assessments.
To try and counterbalance risk, many organisations are applying blanket bans on all contracts. Organisations that adopt this approach will only engage workers on a “on-payroll” basis. While mitigating potential risk, Organisations who adopt a blanket ban will typically increase rates (but not always)
Every worker must be treated with respect regardless of whether they are a consultant or permanent employee. However, it is important to remember that consultants aren’t employees, and therefore shouldn’t be seen to be or treated as ‘part’ of the organisation..
If a contractor’s role is determined to be inside IR35, they can engage using one of the following options:
Umbrella Company – We will pay the Umbrella Company gross and the Umbrella company will pay you net of deductions.
PSC with deductions – we will work with a Service Provider to ensure the necessary PAYE Tax and National Insurance contributions are processed.
An Umbrella Company acts as an employer for You / Contractors by collecting fees for Contractor’s services from the Agency/ End Client. The Umbrella company will deduct all employment costs and a weekly management fee for running your contract. You will be paid after the normal employee’s deductions of Tax, National Insurance Contributions and pension contributions. Typically, you are entitled to statutory employment benefits such as sick pay and holiday pay. Working through an umbrella company puts you outside the scope of IR35.
Vantage have an accredited list of market leading service providers who are contractually obliged to ensure the very highest standards of legal and tax compliance. They are as follows
Yes, their current assignment will need to be terminated with an end date that has taken into account the current notice period. Notice will be served under the current terms upon confirmation from the Client. A new assignment will need to be raised and aligned to the contractors new tax status – this could be on a PSC with deductions or on an Umbrella basis. The latest date you can work through your current PSC is 5th April 2021.
We CANNOT ‘get an assignment outside IR35’. Contrived appointments that seek to circumnavigate the Rules will be exposed in the event of an investigation by HMRC and the tax liability could be extensive. It is to this end that we will work with our Clients to ensure compliance with the Off-Payroll working Rules, which means that engagements will be aligned to the status determination communicated to us by the end Client and our third party experts such as QDOS assessment.
The status assessment of Inside IR35 will have no direct bearing on your / a contractors employment law status or legal rights. However, if you / a contractor changes to a PAYE temporary worker either directly through an Umbrella Company route, they will be entitled to statutory benefits such as statutory sick pay and holiday pay and they will fall in scope of the Agency Workers Regulations which has equal treatment provisions for agency workers.
They should speak to us in the first instance. It is key that the contractor continues to operate as an independent business and as such any element of supervision, direction and control and integrating them into the workforce, could compromise their status. The working practices are key and the end client will need to be guided on this to ensure they fully understand the possible impact this could have on the contractors status.
They will have various engagement options open to them if they are deemed ‘Inside IR35’. There are increased costs if the contractor works through an Umbrella model or deducted PSC and we will be required to engage with the Umbrella Company through a new contract arrangement, and possibly at a lower rate of pay. Whilst our end Clients will do their best to increase rates where viable, they are not obliged to increase the rates of pay. This will be a matter for us to discuss with the client.
The amount of tax payable will be dependent on your PAYE tax code provided by HMRC and is largely dependent on your set of tax circumstances. If you are being paid PAYE via an Umbrella arrangement the Umbrella Company will provide you with an indicative calculation on your take home pay. You should expect to that if you are paid PAYE, your first few payments for services performed after 5th April may be subject to higher PAYE tax deductions.
As a crude rule of Thumb (dependant on if the client pays for their NI or ups their rate) the contractor can pay anywhere between 20% to 25% .
Most clients will allow for some expenses to be reimbursed but this would need to be agreed at the outset of the engagement with VANTAGE and the Client. Currently, working through a PSC, contractors will have some allowable expenses that come with running your own Company. Typically, they are entitled to a 5% tax allowance. From 6th April if their engagement has been deemed Inside IR35, they will no longer be able to take advantage of this tax allowance as they will be engaged as a PAYE worker. For clarification please discuss with your accountant.
Yes. If their tax status is changing and they’re are currently providing services through their PSC, their engagement will need to be reflected correctly, including any potential rate changes as a result of the tax status changing. Vantage will need to provide notice on their current engagement and re-engage under different Terms that reflect their new tax status. e.g. a contractor may decide to move to an Umbrella arrangement. In this scenario, their new contract will need to reflect an engagement with the Umbrella Company.
HMRC will not provide assurances that there will be any pre 6th April 2021 amnesty and we simply cannot offer assurances to any candidates regarding possible HMRC investigations. We would urge them to seek advice from their Accountant should they be concerned about their previous liability before they proceed with the new engagement. As is currently the case prior to 6th April, the contractors are responsible for their own tax status and ensuring that their businesses are paying the correct levels of Tax and National Insurance contributions to HMRC
Yes, although it would appear that aside from a few potential adjustments, there is unlikely to be a delay in the implementation date of 6th April.
Contractor Solutions IR35
If you are looking for further information on IR35 reform (Off – Payroll working legislation), what your options are then please download our IR35 Questions Answered factsheet. If you would like to talk to one of our experts please get in touch or call us on 01785 339 000.