Background
In April 2017 the off-payroll working rules were introduced to the public sector, which shifted the burden of proof in determining employment status from contractors to public sector hirers. This fundamental change has netted over £400 million from workers who otherwise would have been paid gross, taking most of their remuneration as dividends. From April 2020 the legislation will be rolled out to the private sector.
Risk
In order to understand how the market reacts to new legislation, it is important to understand where the risk lies. Risk always dictates behaviours. Under this legislation the risk, whether directly or via debt transfer, ultimately lies with the hirer. Clearly, the primary risk is where the hirer decides that an assignment is outside IR35.
A hirer’s gross financial liability for lost tax, National Insurance, apprenticeship levy, interest and moderate penalties over a 3-year period for an average contractor earning £100,000 pa is well over £100,000. It is therefore likely that most hirers will shy away from taking the risk.
The risk is not only financial but also reputational – there are plenty of businesses and individuals currently making the national news for apparently not paying the correct amount of tax. Many businesses use hundreds, sometimes thousands, of limited company contractors, so the combined liability (including penalties) could easily amount to millions of pounds.
What should FDs being doing to prepare?
Based on happened in the public sector in 2017, and on the basis of anecdotal evidence in the private sector already, finance teams should consider the following:
- Make sure your suppliers are on top of all this – ask them to detail their plans
- Work out how many contractors are engaged by your organisation, including directly engaged personal service companies (PSCs), PSCs supplied via staffing companies, and PSCs working via consultancies. Are there business units with off-payroll workers who may not be aware of the impending changes? Try to establish as complete an inventory as possible of how many contractors are working in your organisation and the means by which they are engaged
- Consider which PSCs may and may not be inside IR35. Consider finding an adviser who can support you with this exercise. Use of the employment status tool provided by HMRC (https://www.tax.service.gov.uk/check-employment-status-for-tax/reason-for-using-tool) is strongly recommended but be aware that its determinations do not have statutory effect. While HMRC is likely to give significant weight to a decision arrived at via this tool, it may not always be bound by the decision
- Work with suppliers to put in place procedures to ensure PSCs do not move into aggressive tax avoidance schemes
- Don’t be pressurised by workers seeking to challenge your decisions. There has been much discussion about workers having a right to challenge determinations and possibly bring claims in circumstances where they are incorrectly assessed. In reality, however, it is unlikely that contractors deemed inside IR35 will have any legal recourse if they disagree with that assessment
- Do not create assignments now which will expire after 6 April 2020 – any assignment which straddles that date may, unless pay rates are grossed up, lead to claims because, amongst other things, employers NICs will suddenly have to be deducted leading to a material reduction in gross as well as net pay rates
- There may be a number of contractors who are deemed crucial. It might be worth giving them a rate increase to compensate for the additional tax they will have to pay. There were reports of an exodus of contractors from the public sector in 2017 but when the rules apply to the private sector there will be limited alternatives for disgruntled contractors other than to find an organisation prepared to assess them and pay them outside IR35. Most, then, will have to accept the new regime but those with business-critical skills likely will have greater bargaining power
- Another option for hirers is to outsource some or all of their contingent work to a company under a service contract sometimes known as a statement of work contract. The legislation then becomes the problem of the service company who would be deemed to be the hirer
- Where an end-user receives “contracted out” services (and not labour supply), that service will not be subject to the regime. Effectively, this means that the regime will only apply to entities in a supply chain involving labour supply. While this is good news for users of “genuine” statement of work-style services (in which consultants deliver a pre-scoped piece of work for a fixed price), they will need to be “genuine” – merely labelling something as statement of work will not be sufficient, and the likelihood is that many time-charged based consultancy arrangements will be caught
Outcomes
From next April the use of off-payroll workers will become considerably riskier in all organisations. This means a higher proportion of contractors will be working through compliant PAYE umbrella companies, agency PAYE or professional employment solutions. The priority for FDs is to ensure their organisations have greater control over their supply chains to ensure compliance and financial stability.
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