What is IR35?
The off-payroll working rules (commonly known as IR35 or ‘the intermediaries’ legislation’) have been in place for some time, originally introduced in 2000. The Rules were brought about to ensure that if a worker looks and acts like an employee, and works through an intermediary like a Personal Service Company/Partnership/etc, they should pay similar taxes to other employees.
When will the new rules in the Private Sector take effect from?
The Rules will take effect from 6th April 2021. This means that any payments made to contractors working through a Personal Service Company (PSC) following that date will be subject to the new Rules.
What is changing?
Going forward it will not be the contractor that decides their own IR35 status. The responsibility for assessing employment status is changing. It will be the end Client who the PSC supplies their services to that will need to make a determination on whether the Off-payroll rules apply to the assignment.
What will clients need to do differently going forward?
Before a client engages a contractor and upon the instruction of a new role, the client will be required to make a determination on whether the rules apply to the specific assignment.
Similarly, for all incumbent workers, the client will have to provide a determination on whether the Rules apply to the specific assignment the workers are engaged on. It will be a requirement to send a written copy of the determination along with the rationale or reasons why that determination was made. That determination will be shared with all parties in the supply chain eg. with the agency and/ or an Umbrella company and/or the Personal Service company. This determination is what we call the Status Determination Statement.
Who does it affect?
If the end client is a small company, do I need to consider the Off-Payroll Rules?
The reforms will not be applicable to any small companies as defined by the Companies Act 2006.
If the end client satisfies 2 of the following criteria:
- Annual turnover of no more than £10.2m;
- balance sheet total of not more than £5.1m or
- no more than 50 employees
then the small company is exempt from the changes. Unincorporated organisations with a turnover of less than £10.2m will also be exempt.
Where companies are exempt, the existing IR35 rules apply which means it is the intermediary (PSC) that is responsible for applying the rules.
When a company becomes or ceases to become small in an accounting period, for the purposes of the off-payroll rules that change will apply from the start of the tax year following the end of the at accounting period irrespective of whether the organisation is incorporated or unincorporated.
I am working remotely in the UK for a company based abroad. Do I need to consider the Off-Payroll Rules?
Yes - If you are using a UK Personal Services Company then you are a tax resident in the UK and you are therefore in scope of the Off-Payroll Rules, even if the Company you are providing work for is based abroad.
With so many of us working from home at this time, will it affect my IR35 status?
One of our Preferred Umbrella Companies, Brookson, has recently issued a blog on this very question and it can be found here: https://www.brooksonlegal.co.uk/news/does-working-from-home-affect-a-contractors-ir35-position/
How can I be engaged to carry out a service to an end client?
What is a Personal Service Company (PSC)?
Otherwise known as a Limited Company, a PSC is the vehicle employing a Representative to provide the services to the end Client. Usually, the Representative has a material interest in the Company, ie For a PSC this means they must own or have a beneficial interest in more than 5% of the shares of the company; For a partnership, they must be entitled to 60% or more of the profits of the partnership.
What is an Umbrella Company?
An Umbrella Company acts as an employer for contractors by collecting fees for the 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.
If I am working as a PAYE worker now or through an Umbrella Company, will the off-payroll working rules affect me?
No, this legislation does not affect or impact PAYE or umbrella company workers as PAYE and umbrella company workers are taxed and NI’d at source.
What are my engagement options if my assignment is determined to be inside IR35?
If your role is determined to be inside IR35 you can engage in one of the following options:
PAYE – the Agency will make the necessary tax and NI and statutory deductions from your pay
Umbrella Company – the Agency 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 that the relevant deductions for your PSC are achieved.
Can I use my own Umbrella Company if I choose to engage through that vehicle going forward?
Staffing 360 Solutions has 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:
- Paystream (ph: 0161 929 6000 or email@example.com)
- Brookson (ph: 01925 235 762/ 0800 230 0213)
- Giant (https://www.giantpay.co.uk/umbrella)
Staffing 360 Solutions have agreed a preferential rate for all workers wishing to use their services.
To find out more about why compliance is important: https://www.fcsa.org.uk/wp-content/uploads/2018/04/Compliant-Umbrella-firms-factsheet-2017.pdf
Key indicators for assessing employment status:
'Control’ is one of the areas that will influence my status determination. Can you explain what it means?
Control is one of the key areas for consideration when determining the IR35 status of an assignment. Control will look at:
- How the services are carried out
- Where the services are carried out
- Whether there is any control by the client in carrying out the services
If the contractor is the party controlling how the services will be delivered, this would show that there is very little control by a third party and would indicate more of an Outside IR35 determination. However, if the Client controls the service provider then it's more likely the role will be determined as Inside IR35.
If I cannot provide a substitute for my services, would that put me inside IR35?
One of the indicators when making a determination is whether the Contractor has been engaged to provide a personal service.
Personal service is a strong indicator of employment status. Consider if you were a permanent employee, it would not be an acceptable practice to send a substitute into your place of work to carry out your work.
However, if you run a business, it would be widely expected that if you were unable to attend services to carry out the services because you were carrying out work for another customer/ you were ill or you were on holiday, that you would be able to send a substitute to carry out the services in your absence.
Where a contractor is operating Outside IR35 there should be a ‘Right of Substitution’ clause in the contract, however, it’s not enough just to have a clause in the contract – what’s more relevant is that it must be reflected in the working practices of the arrangement; meaning that if a substitute was provided at any point, that substitute would be accepted by the client.
If I can’t substitute my services with an alternative representative, will this have a bearing on my determination?
Providing a substitute/ alternative is only one of the factors taken into account when a contractor's assignment is determined. If a personal service is required and you cannot and have not exercised a substitute, then it would be a strong indicator of employment status.
This is because it is highly unlikely that a permanent employee would be able to send a substitute into work to carry out their assignment if they couldn’t make it in or decided to take on work elsewhere. It is key that supplying a substitute extends beyond the Contract Terms; you must be able to provide a substitute in practice and that substitute should be accepted by the client.
Mutuality of obligation (MOO)– what does that mean?
Another important indicator when making a status determination is whether there is an obligation on the client to offer the contractor additional work beyond the assignment period that was originally agreed and whether the contractor is obliged to accept that work offered. If there appears to be this obligation between the parties then this could point towards an Inside status determination. If there is no obligation to offer or accept additional work outside the agreed contract then this would lend itself to more of an Outside determination. This should not be confused with the requirement from a Client to offer extended terms to meet the additional requirements of a project that the Worker may be working on. If there is a requirement from the Client to continue the engagement then a new contract should be provided.
If the working practices onsite compromise my tax status what should I do?
You should speak with us in the first instance. It is key that you continue to operate as an independent business and as such any element of supervision, direction, and control and embedding you into the workforce, could compromise your 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 your status.
I have been working for the same client for several years. Do I risk being determined as Inside IR35?
The time you have been on assignment with the client is a factor that is considered in determining your IR35 status. If you have been working with the client for a long period of time and have become part and parcel of that organisation, the role may be considered Business As Usual and furthermore some of the key indicators as described above, Control, Supervision, Mutuality of Obligation may have changed somewhat. We would advise that you are always considering HOW you are performing the Services and ensure regular reviews with the Client to ensure that you do continue to operate as a truly independent business.
What is a status determination statement (SDS)?
The off-payroll rules carry a requirement for a Status Determination Statement (SDS) for all engagements where the services are provided by an individual working through an intermediary such as a Personal Service Company. The SDS is a statement that confirms the status decision made on engagement and the rationale behind that decision.
Who will decide whether the IR35 rules apply to an assignment?
Currently, it has always been the contractor's PSC that determines whether an assignment is inside or outside IR35. Going forward it will be the end client’s responsibility to determine whether the IR35 Rules will apply and for determining the employment status of the worker.
Who is the SDS shared with?
The SDS is shared with all parties in the labour supply chain. The SDS should be generated by the end Client and shared with the contractor and the next party in the supply chain, usually your Agency - the Fee Payer.
When does the SDS need to be shared?
If you are already providing services and intend to do so beyond 5th April 2021, the end client will have to provide an SDA. We require all SDS’s to be shared with us prior to 1st March 2021 so that we can take the necessary steps to ensure that the engagements accurately align with the tax status beyond 5th April 2021.
For new engagements, an SDS should be given to us and you at the point of a role instruction or at the latest, before the assignment or supply of services commences.
What does ‘in scope’ mean?
If a role is deemed as in scope it means the contractor is deemed as an employee for tax purposes only and relevant tax and National Insurance needs to be deducted.
In what form should the SDS be supplied to me?
The SDS should be in writing and should detail the role, the determination, and the reasoned argument for why the end Client has arrived at the determination outcome. It should also detail the appeal process available to the contractor in the event the contractor does not agree with the determination. It is also acceptable for the Client to provide a copy of the CEST determination, which can be downloaded/ printed from the CEST site and sent to the Agency and contractor.
What if an SDS is not given?
The party in the labour supply chain that does not fulfill its obligations under the Off-Payroll Rules will be the party that will carry the liability for any underpaid tax and NIC’s. If the Client does not provide its status decision or the reasons for that decision, where requested and within the required timescales, or if it fails to take reasonable care in making its status decision, liability to deduct tax and NIC’s will move to the end Client. Similarly, if the end Client or Agency provides contrived arrangements designed to get a particular outcome from the service eg an Outside IR35 determination, HMRC would treat as evidence of deliberate non compliance with associated higher penalties.
The End client that I work with has issued Blanket Determinations for all roles. Can they do this?
A blanket determination is the application of an IR35 status to apply across a large group of off-payroll Workers. In other words, where an End Client determines that all contractors in a particular department, a series of departments, or company-wide are either Inside or Outside IR35. It is typically done without due consideration or assessment of the individual roles and is at odds with what the legislation is seeking to achieve. Whilst the Agency cannot control the approach the Client takes, we would not recommend this approach as there is a requirement in the legislation that obligates Clients to take reasonable care in its assessment of engaged contractors. Reasonable care was added to the legislation before the Reform to the Public Sector rules came into play in 2017. It was to prevent clients from making blanket determinations and to guard against inaccurate assessments being provided. For an end client to show reasonable care, we would advise them to take the following steps:
- Ensuring that all the relevant staff members, and particularly hiring managers and those making the determinations, are well versed in the Off-payroll working rules
- Ensuring a well-documented process for determining the status
- Making a determination on each individual assignment
- Ensuring all relevant parties are included in the process of making a determination, eg Worker, Agency, Hiring Manager
- Setting up an IR35 Working Party who can answer questions and provide clarity on determination outcomes
- Ensuring an appeals process is in place
Will an Inside IR35 assessment mean I will have more employment rights?
The status assessment of Inside IR35 will have no direct bearing on a contractor's employment law status or legal rights.
Who is responsible for what?
What is the responsibility of the Agency?
The Agency must fulfill its obligations as Fee Payer by ensuring that payment made to the Contractor is aligned to the Status Determination Statement received by the Client. If the Status Determination Statement shows a determination of Inside IR35, then the Agency is responsible for calculating the payment due to the Personal Service Company or Contractor as well as deducting any employment taxes, employee and employer National Insurance and reporting this information to HMRC.
Tools for making assessments
What tools will the End client use to arrive at a tax status determination?
There are various ways to arrive at a status determination. It will be the Client’s choice as to what their methodology will be to assess a role. They may use a single method or they may use a combination of methods to arrive at a determination. Assessment may be made utilising HMRC’s CEST (Check Employment Status for Tax tool) and/or an independent business specialising in IR35 assessments and/or the expertise of an internal team (HR/ Procurement/ Tax/ Hiring managers).
What does the CEST tool cover?
The tool asks a range of questions including (but not limited to):
- Who is completing the tool
- Type of intermediary the worker works through
- Whether the role is an officeholder role and whether the services provided relate to that office
- Whether the Worker can send a substitute and has provided one in the past
- How much supervision, direction, and control is in the role
- Whether the worker has to pay for any materials in order to provide their services
- Whether the worker is part and parcel of the organisation ie integrated with the workforce
The tool will give an outcome of:
- The worker is an employee for tax purposes, which means that PAYE tax and NICS are due
- The worker is self-employed for tax purposes, which means the intermediary remains responsible for its own tax affairs
Appealing a Status Determination:
What happens if I don’t agree with the Client’s status determination?
Under the legislation, end Clients are expected to set up a status disagreement or appeals process to help resolve disagreements about the status decision that has been reached. The contractor or the Agency will be able to make representations to the end Client if the contractor or Agency does not feel the SDS reflects reality. This could involve providing the End Client with evidence (an independent assessment for e.g.). The End Client is expected to respond to those representations within 45 days of receiving a notification. The End Client can respond in 2 ways:
- inform the contractor or the Agency that they have considered the representations and decided that the SDS is still correct and give reasons for that decision OR
- Give a new SDS containing a different conclusion than the previous SDS is withdrawn
What is the effect on my pay?
What does it mean to my pay if an assignment is determined to be Inside IR35?
If an assignment is determined to be inside IR35, the PSC will pay income tax and Employee’s NIC to HMRC. The PSC also has to pay Employer’s National Insurance Contributions at 13.8%.
If I am deemed Inside IR35, will the end Client have to increase my rate of pay to compensate for any financial losses I may incur?
End Clients are not obliged to increase their rate of pay. This will be a matter for you to discuss with your Consultant.
Will I need a new contract if my assignment is deemed Inside IR35?
Yes, your current assignment will need to be terminated with an end date that has taken into account your current notice period. Notice will be served under your current Terms upon confirmation from the Client. A new assignment will need to be raised and aligned to your new tax status – this could be on a PAYE, PSC with deductions or on an Umbrella basis.
What is the last possible date I can work through my Personal Service Company if I am now deemed Inside IR35 and making a switch to an Umbrella Provider?
Every Agency is different but given that the new rules take effect for work carried out from w/c 6th April 2021contractors who fall within IR35 have until 26th March 2021 to work through their current Personal Service Companies.
We cannot process any gross payments to Personal Service Companies beyond 26th March 2021. If you are deemed to be Inside IR35 and you send us a timesheet after this date for work completed after 26th March 2021, we will have to deduct Tax and NI from your pay.
If I want to continue working outside IR35 what can I do to keep me Outside and can you provide me with a Contract that puts me Outside IR35?
You should always be mindful of providers who say they can ‘get your assignment outside IR35’. Our contract is aligned with the Status Determination shared by the Client. The determination rests with the Client and we cannot and will not influence the status of that determination in any way, including the provision of contracts that puts someone outside IR35, if the reality of the role is that you are working Inside IR35. There are actions contractors can take to operate as a true business which includes many of the elements already covered such as:
- Control – ensuring that YOU are in control of the work you are performing including when and where the services are carried out.
- Substitution – ensuring that in practice you are able to offer up a substitute and ensure that the client is willing to accept a substitute if you are unable to provide the Services
- Financial risk-taking financial risks in running your business
- Mutuality of Obligation – ensuring that the work you are providing is defined in a Contractual agreement with a defined Schedule and Scope of Works and ensuring that you deliver the Services aligned to that agreement.
I have been given an option to go on a fixed-term contract directly with the client. What does that mean?
For all intents and purposes, a fixed-term contract is an employment contract issued by an end Client. It works like a permanent role apart from the time period in that you are only engaged for a fixed amount of time eg a 6 or 12-month contract. A fixed-term contract provides additional employment benefits that you wouldn’t ordinarily get as a contractor engaged on a Contract for Services. You are also engaged and paid directly by the end Client, not through the Agency although the Agency will be the party who manages your offer with the end Client.