Q: When is a contractor not a contractor?
A: When HMRC deems them to actually be a company employee
This might sound like a bad joke. For contractors working in the private sector and for the companies using them, it’s about to get serious.
In May 2018, HMRC started a consultation on the enforcement of tax legislation IR35 in the private sector, ending 10 August. The intention is to get much stricter on it, starting April 2019. This will likely have major implications for contractors working through Personal Service Companies (PSC), the companies benefitting from their service (End Users) and whoever pays the contractor (Fee Payer).
Arrows Group has been working closely with our clients and contractors, helping them be clear on their responsibilities, options and create relevant solutions.
What is IR35?
IR35 is a piece of tax legislation brought in by Gordon Brown in 2000. It aims to identify whether a contractor working on an assignment for a company is a contractor or, truthfully, if they are an employee in all but name. It only applies to contractors operating through their own limited company, or PSC.
Essentially, if a contract or assignment is found to fall inside IR35, the contractor is considered to be a “disguised employee” and their income will be subject to PAYE tax and National Insurance. If it falls outside IR35, they are deemed to be a business in their own right supplying a service and can continue operating via their PSC without the deduction of PAYE and NICs.
Why is IR35 in the spotlight now?
In 2017, HMRC brought in reforms on the enforcement of IR35 in the public sector. These reforms included:
* Making the End User responsible for determining if a particular assignment falls within IR35 (n.b. the contractor can be within IR35 for one assignment and outside for another with the same End Client).
* Making liability for non-compliance flow up from the PSC to Fee Payer to End User
* Ensuring those inside IR35 have PAYE / National Insurance deducted at source
The unfortunate upshot for the public sector has been a mass cutting of independent contractors, with public sector companies worried about possible liabilities. This has meant a huge loss of talent for these companies and, ironically, increase in costs as many have had to plug the gaps with management consultants.
The expectation is the government will pursue the same reform options for the private sector from April 2019.
By thinking and planning ahead, we believe it’s completely possible to avoid the disruption that has hit the public sector.
How can you tell if a contractor is inside or outside IR35?
There are three key rules to determine if a contractor is inside or outside IR35.
1) Mutuality of obligation
If the company is obliged to offer the individual work and the individual is obliged to take it, they may be considered to be an employee.
2) Right of substitution
If the contractor cannot substitute themselves to deliver a project, they may be considered to be an employee.
If the contractor is being managed by the end client on a daily basis, they may be considered to be an employee.
Further clarification is expected on these rules ahead of April 2019.
HMRC have suggested they will be bound by the results of their CEST online tool (Check Employee Status for Tax).
It is important to realise that IR35 is determined on an assignment by assignment basis and doesn’t apply to the individual worker – i.e. a single contractor may work on some assignments inside and some outside IR35 and have to determine their tax liabilities accordingly.
Who is liable for determining IR35?
This is one of the most frequent questions we are asked. From April 2019, the liability for paying the appropriate taxes will be with the Fee Payer and ultimately the End User.
What are the options if a contractor for an assignment is found to fall within IR35?
Many contractors think their choices are only to find work outside IR35 or become an employee, but this isn’t the case. There are actually three options open to them when assignments fall inside IR35.
1) Take on ‘deemed employment’
The contractor can actually keep working through their PSC, but they need to class the work as ‘deemed employment’ and ensure taxes are being deducted at source by the Fee Payer.
2) Work through an umbrella company
Contractors can work through an umbrella company, instead of their PSC. The umbrella company will send invoices and take on responsibility for paying PAYE and National Insurance.
3) Accept a contract of employment
There is, of course, always the option to work directly for the company under a contract of employment.
It is up to the contractor what solution they accept.
What should companies and contractors do ahead of April 2019?
Both companies and contractors should make sure they’re fully aware of the regulations and the options open to them.
Of course, there are benefits for clients and contractors of working with a workforce solutions company like Arrows Group. Our clients can be reassured that by using our workforce management solutions services to fill work, IR35 liability rests with us. We have been working with our clients on creating statements of work (SoWs) for projects for the past 7 years – i.e. creating genuine pieces of work in a construction compliant with IR35.
For our contractors, who make up around 65% of our business, we offer both advice and our preferred supplier list of umbrella companies who we audit quarterly – if the contractor wants to use that solution.
One of the other implications of the clamp down on IR35, is that it may drive up prices, as contractors mitigate their increased tax burden. This could play out as a simple increase in day rates, or a squeezing of margins across the whole chain. This is something we need to work together to resolve – the last thing the private sector wants is the exodus of talent that has taken place in the public sector.
I am absolutely on the side of HMRC. They are not looking to disrupt contractors, just find out legitimately who’s actually an employee, within the parameters of IR35. I also believe the impact will not be as high as people fear. In the government’s briefing note of May 2018, they stated their expectation that only one third of contractor assignments will fall within IR35. In the tech sector, we expect this figure to be even lower. By staying calm and talking now, we can make sure we are all prepared and have the solutions in place to keep expert contractors within companies.
If you would like more information on IR35 or are interested in knowing more about our IR35 roadshows, contact Charlie Sell on firstname.lastname@example.org