This article is written for you, the worker in a personal service company/contractor company providing services to private sector clients. If you are a private sector client of such companies, then you would benefit from reading my separate blog, click here to go to it.
This is where we are in terms of the law and practice as at November 2019.
Background
It is incredible but it is almost 20 years ago now that IR35 was first brought into force.
It was put in place to try to make sure that contractors like you who work through what HMRC call an ‘intermediary’ who because of (i) what you do and (ii) how you do it, and would ordinarily have been treated as an employee if you had been contracted directly by the client, pays about the same tax and NIC as if you were employed.
At the time I write this, it is the contractor / personal service company whose responsibility it is to determine whether IR35 applies and, if it does, to pay the right amount of tax and NIC under the existing rules. That is to say the risk of getting it wrong – lies with your company and not your client for whom you are working. But all that is changing…
You see, in 2017 the government changed IR35 for intermediaries/personal service companies/contractors working for public sector clients. Under those new rules it became the responsibility of the public sector client, and not the personal service company, to decide whether IR35 applies and to account for and pay the right tax and NIC by adding them to the payroll and deducting PAYE and NIC. HMRC were essentially forcing other government departments to police things for them, after all HMRC are short of people as a result of all the cuts they’ve made and saw this as an opportunity to generate some more cash.
HMRC set up an online tool known as CEST (‘Check Employment Status for Tax’) to help the public sector make the right decision as to whether IR35 applies. Here’s a link to that tool: http://bit.ly/2QaL5of
What’s happening from April 2020?
From next April, the reforms that were put in place in 2017 for public sector organisations will apply to medium and large companies in the private sector. So from then the private sector client will have to decide whether IR35 applies and account for and pay the right tax and NIC, adding them to the payroll if necessary.
So what is a medium / large company to whom the new rules apply? It’s easier to say what is a ‘small company’ to which the new rules do not apply. A small company is one which satisfies two or more of the following tests – turnover under £10.2 m; balance sheet total of under £5.1 m; and less than 50 employees. remember the new rules will apply to companies that are not ‘small’. They will apply to a lot, but not all companies/
And what is interesting is that for unincorporated businesses, such as sole traders and partnerships, only the turnover test applies. Why?
The government believe the new rules will raise an additional £1 billion in tax and NIC a year from the private sector, a not inconsiderable amount.
How much of that will be coming from out of your pocket?
What is HMRC encouraging private sector clients to do?
HMRC is encouraging private sector clients to use the CEST tool it set up to asses your status – here’s the link again, http://bit.ly/2QaL5of – but interestingly have said that they will not be bound by the result it produces, although the outcome will be persuasive where the client has completed the tool properly.
To complete the CEST tool, you can expect your client(s) to consider everything that happens on a practical working level in terms of your work and not to treat the assessment as an academic exercise based purely on the documentation passing between you.
A lawyer, Rebecca Seeley Harris, hsa warned that CEST should only be used with caution as it is not, in her view, neutral. Click here to read her article of 26 November 2019.
Once the client has made a decision, what do they do?
Having used CEST and made a decision as to your status, your client will then make a ‘Status Determination Statement (‘SDS’), sending it to:
- You as the individual worker; and
- Where the work is provided through a chain (eg through one or more personal service companies), to whoever is immediately below them in the chain. Note that if you receive one it is then your job to pass it on down the chain.
The SDS must include your client’s decision over whether they believe you should be treated as an employee for income tax purposes or not. And they must give their reasons for their decision.
So that all well and good, but who is responsible for deducting and paying the income tax/NIC?
The responsibility falls on the ‘fee payer’ – this is whoever pays the intermediary/personal service company for the work you do.
This means that where a client contracts with an intermediary directly, it is the client who will also be the fee payer. But it does not have to be that way, for example where there are complicated chains.
Once you have a SDS, can it be disputed?
You can expect your client(s) to set up procedures for dealing with any disputes over the SDS they have issued, but the legislation contains a few ‘must haves’ – for example where the SDS is disputed by you, the client must within 45 days:
- Explain why they consider the SDS to be correct; or
- Withdraw the SDS and replace it with a different decision.
So you do have the ability to dispute a SDS.
The answer is if you do, and your client is a major work provider, do you?
Could your client be responsible for paying your income tax/NICs?
The answer is yes they can, in certain circumstances.
These are:
- Where the client is the fee payer and:
- it has decided that, without the intermediary, the relationship between it and you would be one of employer/employee; or
- it has decided that the relationship is that of independent contractor and therefore falls outside of IR35, BUT HMRC successfully challenges its determination.
- where it is not the fee payer and:
- it has determined that without the intermediary, the relationship between it and you the worker would be one of employment, BUT:
- the fee payer fails to account for all of part of the income tax/NICs due; or
- the client has not:
- provided a proper SDS;
- responded fully to a dispute within the 45 day timescale; or
- withdrawn the SDS and notified you the worker and any other entities of this when it had to.
- it has decided that the relationship is that of independent contractor and so falls outside of IR35, BUT HMRC successfully challenges its determination.
- it has determined that without the intermediary, the relationship between it and you the worker would be one of employment, BUT:
As you can see from this, HMRC can recover Income Tax/NIC from entities in the chain other than the fee payer.
Which they choose to collect from in what priority remains to be seen – there must be a risk, especially for your client with deep pockets, that they are asked to pay up. This means that you can expect your client to take this change in law very seriously indeed.
What are your clients doing now to prepare?
They may or may not be doing anything.
Some are still worrying about Brexit as a priority.
Others will be reviewing their existing legal and working arrangements with both you and (other) intermediaries to assess whether, and if so to what extent, the new rules will impact on them and their arrangements with you. April 2020 is really not that far away…
Their review probably includes:
- Identifying which companies / organisations that they work with are ‘intermediaries’ and who is working for which intermediary and on what basis.This sounds easy, but it may not be so.You can expect your client(s) to put a term in your contracts with such companies /organisations requiring you to: (i) advise them when you might become an intermediary, because you change how you work; and (ii) provide them with all the information they might need to make a proper SDS determination (otherwise what would force you to do so?).
- Them making a SDS determination.
To carry out a SDS determination and protect themselves going forward they will be:
- Gathering information from you and others up and down the chain on
(i) the work done for them and
(ii) what you do and how for other clients. - Gathering evidence that they have taken reasonable care in making the determination.
- Gathering evidence how and when they sent the SDS to you and others in the chain.
- Training their staff to identify when the new rules may apply and how to deal with disputes / renegotiation of terms.
- If they have determined that a worker falls under the new rules, they may want to agree fresh terms with the intermediary or any company inbetween them. This takes time…more time than people expect.
- Assessing the practical and cost implications of all this, and deal with them.
- Assessing and planning for a potential liability to pay the tax should whoever the fee payer is default. They will be looking for ways to protect against themselves. They may ask you to provide a personal guarantee. And they will certainly be assessing the financial condition of all those in the chain.
- Bearing in mind that this is not a one-time review, it’s a continuing exercise going forward– circumstances change, the SDS will need redoing some time.
Here’s a link to some additional guidance which you might find useful when carrying out the assessment. Rebecca Seeley Harris has also given some helpful additional guidance in her article. Click here.
Conclusions
HMRC would not have brought in these rules if they did not think they would raise more money for the Treasury by doing so while at the same time placing the responsibility for doing much of the policing on to the private sector.
The rules place a new responsibility on your medium and large sized clients where no such responsibility existed before, they have brought many more people and organisations into HMRC’s sights. And they might be easier to target than you, and other personal service companies are, at the moment. Your long-standing relationships with your clients will now come under scrutiny for the first time in a long time, and as a result some could change forever.
Your personal service / contracting company might have to be liquidated through a solvent, members’ voluntary, liquidation in order to ring-fence historic profits or or indeed through an insolvent, creditors’ voluntary, liquidation because liabilities cannot be paid. An alternative might be to simply strike your company off, but generally this option only works for companies that have minimal net assets or minimal debts. If you’re effected in any way by the new rules, you will need to take appropriate advice, first off I suggest from your accountant, but after that possibly if a liquidation process is a possibility say where you have surplus money to withdraw or can’t pay your debts, from an insolvency practitioner.
We are yet to see the detail of exactly how the provisions making others in the chain responsible for the payment of any unpaid PAYE and NIC will work. I suspect we will see HMRC knocking on the door of others’ where there has been, in their view, avoidance of tax and not just evasion. That possibility will unnerve your clients. And that is not good for business.
Watch this space, I’ll let you know my further thoughts, but my advice in the meantime is to start thinking about this now… just because the rules are not yet clear does not mean it’s not coming your way…
Update 14 January 2020, here’s a link to HMRC’s helpsheet.