This article is written for clients in the private sector of personal service/contractor companies. Owners of or workers for personal service companies would benefit from reading my separate blog, click here to go to it.
This is where we are 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 anyone working through an ‘intermediary’ such as a personal service / contractor company who because of:
(i) what they do and
(ii) how they do it, and would ordinarily have been treated as an employee if they had been contracted directly by the client,
pays about the same tax and NIC as if they were employed under the PAYE/NIC system.
At the time I write this, it is the personal service / contractor 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, where the client is in the private sector.
That is to say right now the risk of getting it wrong – lies with the personal service /contractor company and not the people they are working for.
But all that is changing…
You see, in 2017 the government changed IR35 for intermediaries/personal service companies 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: they had to add 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.
HMRC set up an online tool known as CEST (‘Check Employment Status for Tax’) to help the public sector make the right decisions.
So what’s happening from April 2020?
From next April, the reforms that were put in place in 2017 for public sector clients 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.
So what is a medium / large company? It’s easier to say what is a ‘small company’ for whom the new rules do not apply. A small company is one which satisfies two or more of the following tests – turnover under £10.2m; balance sheet total of under £5.1m; and less than 50 employees. The new rules apply to companies that are not ‘small’.
What is interesting is that for unincorporated businesses, such as sole traders and partnerships, only the turnover test applies.
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.
HMRC is now encouraging private sector clients to use the CEST tool it set up – here’s the link, 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.
A lawyer, Rebecca Seeley Harris, has 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.
A tip for you when completing CEST! – Consider everything that happens on a practical working level and do not treat the assessment as an academic exercise based purely on the documentation passing between you.
Of course, you don’t have to use CEST, but it’s a good idea if you do.
Once you’ve made a decision, what do you do?
Having made a decision, whether using CEST or not, as to the worker’s status, you, the private sector client will have to make a ‘Status Determination Statement (‘SDS’), sending it to:
- The individual worker; and
- Where the work is provided through a chain (eg through one or more agencies/personal service companies), to whoever is immediately below you in the chain.
The SDS must include your decision over whether the individual should be treated as an employee for income tax purposes or not. And you must give your reasons for that decision.
So who is responsible for deducting and paying the income tax/NIC?
The responsibility falls on the ‘fee payer’ – this is whoever pays the intermediary for the work done by the worker.
This will be you where you contract with the intermediary directly, subject to the comments below.
Can the SDS be disputed by those you give it to?
Yes. So you need to create your own procedures to deal with any disputes over it.
Where the SDS is disputed by the worker, you must, within 45 days:
- Explain why you consider the SDS to be correct; or
- Withdraw the SDS and replace it with a different decision.
Could you be responsible for paying the what is someone else’s Income Tax and NICs?
Yes you can, where:
- You are the fee payer – ie you are the organisation that pays the intermediary – and:
- You have decided that, without the intermediary, the relationship between it and the worker 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.
- You are not the fee payer but it has determined that without the intermediary, the relationship between you and the worker would be one of employment, AND:
- The fee payer fails to account for all of part of the income tax/NICs due; or
- You have not:
- Provided a proper SDS; or
- Responded fully to a dispute within the 45 day timescale; or
- Withdrawn the SDS and notified 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.
As you can see from this, HMRC can recover Income Tax and 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 you if you have deep pockets or a number of contractors working for you.
What can you do to prepare for April?
First off, you should review your existing legal and working arrangements with both intermediaries AND workers to assess whether, and if so to what extent, the new rules will impact on you and your arrangements with them. You need to do this now, April 2020 is really not that far away…
That review should include:
- Identifying which companies / organisations that you work with are ‘intermediaries’ and who is working for which intermediary and on what basis. This sounds easy, but it may not be so.Tip! – You should consider putting a term in your contracts with companies /organisations you continue working with requiring them to: (i) advise you when they might become an intermediary; and (ii) provide you with all the information you might need to make a SDS determination.
- You making a formal SDS determination. And in adequate time!
You need to think about:
- Gathering information from the worker and others up and down the chain on (i) the work done for you; and (ii) what they do and how for other clients;
- Evidencing that you have taken reasonable care in making the determination;
- Evidencing how and when you sent the SDS to the worker and others in the chain;
- Training your staff to identify when the new rules may apply and how to deal with disputes / renegotiation of terms.
- If you have determined that a worker falls under the new rules, you may have to agree fresh, or indeed new terms with the intermediary or any company inbetween (or replace them if you can’t agree!). This takes time…more time than you’d expect. You need to assess the practical and cost implications of all this on your business, and deal with them.
- Assessing and planning for your potential contingent liability should the fee payer default. Think about how you can protect against this. Do you seek personal guarantees? Hold back money? Do you know what financial condition those in the chain are in?
- Bearing in mind that this is not a one-time review, it’s a continuing exercise – circumstances change, the SDS might need redoing some time.
Here’s a link to some additional guidance which you might find useful. Rebecca Seeley Harris has also given some helpful additional guidance in her article. Click here.
Summary
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 medium and large sized companies where no such responsibility existed before, they have brought many more people and organisations into HMRC’s sights.
Your long-standing relationships with people who work for you will now be coming under scrutiny for the first time, and undoubtedly some will change forever. Some personal service / contractor companies with which you currently work will disappear – some will be liquidated through solvent, members’ voluntary, or insolvent, creditors’ voluntary, liquidations either in an attempt to ring-fence previous profits or because liabilities cannot be paid. Others will simply be struck off, there being no need for such companies. You might be forced to bring some people in-house as employees with all the implications that has. You might have to change how you operate.
We are yet to see the detail of exactly how the provisions making others in the chain responsible for the payment of others’ 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.
Watch this space, but start to work on this now… just because the rules are not yet clear does not mean it’s not coming, and soon…
Update 14 January 2020, here’s a link to HMRC’s factsheet.