Here we aim to address some of our clients most frequently asked questions on the potential impact of the IR35 reforms to their current contractor populations.
The IR35 reforms, which were originally scheduled for April 2020 and delayed due to the COVID-19 pandemic, are due to come into effect in April 2021. It’s natural, that with the chaos of the past year, any preparations for IR35 may have been side-lined, but it’s time to start getting ready.
The following information is intended for general information and guidance only. Anyone requiring specific or detailed legal advice should seek the expertise of an independent lawyer.
To increase compliance with the existing off-payroll working rules, medium and large organisations in the private sector and all size organisations in the public sector will become responsible for assessing the employment status of individuals who work for them through their own limited company. The reforms do not introduce a new tax nor seek to change the fundamental concepts and principles of IR35.
What the legislation confirms:
From April 2021, private sector clients will be responsible for assessing whether contractors are inside or outside of IR35 by applying the IR35 criteria. This shifts the responsibility and risk, which has, under the current regime, been that of the contractor, onto the end-client. The change in legislation excludes engagements where the private sector client is deemed to be a “small company”, where contractors will continue to determine their own IR35 status. This means that for medium and large-sized businesses, end-user clients will be responsible for making IR35 determinations (determining whether a role falls 'inside' or 'outside' IR35) for our contractors.
What has changed or been expanded:
a. Determination has been made;
b. Determination is passed down the chain to the next party in the chain and, ultimately to the fee-payer and the contractor;
c. The appropriate tax and National Insurance Contributions (NICs) are paid.
Anyone in the chain who does not do as they are required could be liable for any unpaid taxes which have resulted from their inaction.
Where there is a reasonable prospect that HMRC will not be able to recover amounts owed by the fee payer, HMRC can pursue the parties up the chain for that liability. HMRC have said that they will not seek to flow this liability up the chain where there is a “genuine business failure”, but there is no clear definition of what this actually is. End-clients will now have much more risk where the relevant taxes are not paid to HMRC and for this reason will likely be much more interested in the compliance of their supply chain.
Our Commercial Contracts Team is currently reviewing all client agreements to confirm whether we can supply temporary agency workers that are engaged through a PAYE model (referred to as “PAYE contractors” hereafter). If it's identified that updates to the contract terms are required, an addendum will be drafted and shared with you for review and signature.
We believe the main impact of this reform will be a significant reduction in the number of contractors operating through their own limited companies (commonly referred to as “PSC”) and an increase in contractors taking up assignments as a PAYE Contractor subject to PAYE deductions.
The Agency Workers Regulations will apply to all PAYE contractors. In very brief terms, this means that after 12 continuous weeks on assignment at a client, various rights and basic benefits that are afforded to a permanent employee at the client working in a similar role to that of the PAYE contractor will also be afforded to the PAYE contractor such as holiday and statutory sick pay. Under the Pensions Act a PAYE contractor would also be entitled to enrolment in a pension.
Yes, the current contractors in your team can continue contracting post April 2021. However, you will need to provide a status determination statement on whether the role is inside or outside IR35. Depending on the result of that SDS, you will either be able to engage the contractor that operates through their PSC or one that is engaged as a PAYE Contractor.
As additional costs need to be factored into the PAYE model (including income tax, employee NIC, pension costs, Apprenticeship Levy costs, etc.) which are higher than the costs under the PSC structure, to attract and retain talent there may be a need to increase the amount you are willing to pay contractors. Please speak with your Aston Carter representative who can provide you with further information around the pricing implications of IR35.
IR35 applies to all contracting positions; it is not for an umbrella company to confirm whether a contractor is inside or outside of IR35 — this rests with the end-client. Any claims to the contrary should be scrutinised. Contractors engaged as employees via an umbrella company should already be subject to PAYE deductions.
Working under a “services agreement” alone does not automatically exempt a contractor from IR35 as it depends on the facts of each case and whether the role they work in is deemed inside or outside. In this instance, it would more likely the service provider who would be responsible for the SDS rather than the end-client.
The ultimate decision for declaring IR35 status on a job spec sits with our clients, however we would expect that at least an initial assessment will be made and set out in the job spec and final decision to be shared prior to the start date. In limited situations, this may be subject to change.
This varies greatly dependent on the size of each client and their reliance on the contractor market. At Allegis Group, we do still have clients who are still in the discussion and planning phase to determine the best solution for their business. This tends to mean the creation of a steering committee, consulting IR35 experts and putting together a short- and long-term plan for how they intend to tackle these changes.
Aston Carter provide project based and outsourced services through tailored solutions and rapidly mobilised, high-performing teams.
For further information and to find out how we can help you in your individual situation, please contact your Aston Carter representative or contact our dedicated IR35 support team at IR35queries@allegisgroup.com.