IR35 has been one of the hottest topics in the industry ever since the chancellor of the exchequer’s announcement at the autumn budget - that the IR35 ‘off payroll’ rules in the public sector will be extended to the private sector for large and medium-sized businesses from April 2020.
What is IR35?
The IR35 is a tax legislation which first came into force in April 2000 with the aim of preventing tax avoidance amongst workers who supply their services via an intermediary such as a Personal Service Company (PSC).
HMRC refers to such workers as ‘disguised employees’ as the freelancer or contractor doesn’t meet HMRC’s definition of self-employment, therefore the correct National Insurance Contributions (NIC) and income tax isn’t always paid correctly.
Understandably, private sector businesses are concerned how the ‘off payroll’ rules will have an impact due to the chaos and confusion caused when this was launched in the public sector in 2017.
It is vital that there is a trusting relationship between the recruitment agency and the client.
As a recruitment business with a large freelance book, we may well see a shift from freelance to permanent roles, similar to what happened when it was launched in the public sector two years ago.
Umbrella companies may also see a rise in referrals, as freelancers decide they no longer want the burden of operating through a limited company. With this in mind, leadership teams need to start having conversations around how this may affect their business, and what plans they are going to put in place to tackle this when it comes into effect in April 2020.
What changes post 2020?
- The responsibility for operating the off-payroll rules will shift from the individual to the end client, recruitment agency or another third party engaging with the contractor.
- This will affect medium and large sized private sector organisations only, based on the Companies Act 2006 definition of a small company. The below qualifies as ‘small’ under the legislation:
1. Annual turnover – Not more than £10.2 million
2. Balance sheet total – Not more than £5.1 million
3. Number of employees – Not more than 50
- ‘Reasonable care’ must be taken during the decision making process to ensure the IR35 status is correct, so it is vital that there is a trusting relationship between the recruitment agency and the client
- For workers whose assignments will fall inside IR35, PAYE and NI contributions will need to be deducted at source from their income by the ‘fee payer’ (agency or end client)
- Ensuring all information regarding the IR35 determination is cascaded down the appropriate supply chain. Here is an example of a complex chain: Client > MSP/Rec Co > Rec Co > Fee Payer > PSC > Worker
- The end client should also make sure that they inform the worker of the IR35 determination of their assignment
5 top tips for new freelancers or contractors:
If you are currently operating through a limited company, you are responsible for determining your own IR35 status until the reform in 2020. However, there are a few routes you could take once IR35 hits the private sector next year:
Due diligence: IR35 specialist, Qdos Contractor, reports that over 80% of engagements it reviews fall outside IR35. The determining factors around IR35 are not changing, so there is a strong chance that your engagement should still be outside the legislation in April 2020. It is advisable to take your own due diligence prior to the rules changing, which can act as evidence if a client believes you to fall inside IR35.
Consider switching to an umbrella company: Switching from your limited company to umbrella would exempt you from the off-payroll rules as only PSCs will be affected.
- Any compliant recruiter will have a reputable PSL which you need to ensure you are employed by a compliant umbrella company. I would strongly advise to only use an umbrella company if they are accredited members of either APSCo, FCSA or Professional Passport.
- Gemini People, as members of APSCo, have a compliant PSL that we can share with you but most importantly, we have a partnership umbrella company, Foretwo Group, who we strongly recommend due to the above and beyond service that they provide our freelancers. It should be noted that using an umbrella company will result in substantially less ‘take home’ pay, as you will not only be paying full personal PAYE and NIC on your income, but also employers NIC and a fee to the umbrella.
Remain operating through your limited company: This option would mean having tax and NI deducted at source if your assignment is caught. Remember, IR35 is on an assignment basis, so ultimately this doesn’t mean that every assignment you work on will always be in scope. Alternatively, your assignment could fall outside of IR35 so the appropriate deductions wouldn’t need to be made.
IR35 decisions are based on but not limited to:
- Mutuality of obligation
- Personal service
- Direction and control from the client
- Treated as a permanent employee of that organisation
Statement of work contracts: Engage in a project based contract, speak to the end client/recruiter and see if the option is available as this could potentially be out of scope. This will shift the responsibility of determining your IR35 status from the end client to your agency, but it is vital that any such arrangement is genuine and the actual working practices match the contractual provisions.
The Government’s consultation on the off payroll reforms in the private sector has now been published, and the question is how will it drive behaviour, and what will the outcomes be for the UK’s flexible labour market and the professional recruitment sector. Well, I think we will see a number of things happening, including a move towards umbrella companies for many contractors, a rise in consultancy and statement of work type arrangements, and a rise in the cost of flexible labour.
In terms of the Government’s proposals I think generally speaking they are reasonably sensible, although I would like to have seen further movement on the issue of where the liability sits. APSCo co-chairs HMRC’s IR35 Forum, and we are looking forward to discussing the proposals and the possible outcomes with these stakeholders. In the meantime, we are urging our members to act now, to educate both the end client and contractor populations.
– Samantha Hurley, operations director, APSCo
5 smart ways ‘end client’ employers can get ready for IR35:
- Use the HMRC CEST tool: Whilst there are mixed reviews about whether to rely on the HMRC CEST tool to determine the IR35 status of the contractor, I would advise using this as the first port of call. However, my initial thoughts were similar to most people – the tool is inadequate and doesn’t ask the right questions nor is it clear and concise. Saying that, the HMRC has improved the functionality slightly, and after investing a lot in the CEST tool, HMRC will ‘back up’ the result of this providing the information inputted is accurate in the first instance. I can imagine that lots of businesses will decide to use this option to minimise the risk.
- Familiarise yourself with the CEST tool now: As it will be the end client’s responsibility to determine the IR35 status, I would advise familiarising yourself with the CEST tool early, having a think about those contractors that are in ‘ongoing’ assignments and differentiating which ones will fall inside or outside of IR35 so you can make a plan in time for April next year.
- Be aware of exemptions: If you have sole client control over the assignment schedule and the worker in that role - which includes but isn’t limited to: deciding the hours worked, the duties and tasks carried out, providing the worker’s equipment, notice periods and so on - these types of practises may suggest that the worker is treated more like a permanent employee rather than a freelancer, therefore the assignment determination will more than likely be inside IR35.
- Review how you work with contractors/freelancers: As the end client, changing the way you engage with your contractors and freelancers can ultimately change the IR35 status of their assignment. The more control you have, the less likely the assignment will fall outside of IR35.
- Substitution: HMRC asks lots of questions around this to distinguish whether the worker is engaged on a personal service basis. HMRC touches on substitution, direction and control from the client a lot. It’s time to start thinking about how your freelancers/contractors are currently treated within your organisation, are they treated as a permanent employee or a contractor working on a project? Do they have the right to substitute? Find out here why substitution is a huge factor for IR35
Top 5 questions to ask your recruitment partner about how they’re preparing for IR35:
- Has your agency started reviewing their compliance and payroll processes including the systems they currently use? Do they have the resources to pay PAYE if needed? Or will the agency outsource this to a payroll provider to lessen the headache? If your assignment falls within IR35, you are going to need to know how this is handled internally.
- Their CRM system: How will the IR35 status get tracked? Robust and compliant processes must be in place and the necessary information documented.
- Contracts and terms of business should be reviewed and amended if needed.
- Has their contractor base been reviewed yet and umbrella company candidates eliminated? Most agencies may not have started this process yet. However, working out which contractors will most likely fall inside IR35 and those that will sit in a ‘grey area’ will be a good place to start! There will also be those whose assignments that fall outside of IR35. I would suggest starting with the assignments that are ‘ongoing’ and are most likely to be live assignments come April.
- Does your recruitment partner have the resources in-house to take on the administrative burden of IR35? Who will be the person at your agency responsible for dealing with this and any queries that may arise?
If you are responsible for IR35 in your business:
- Rope everyone in: This is not a solo project, you will need to delegate and choose some representatives to help out from each department, such as operations and finance, but let’s not forget the sales floor!
- Training employees: This is vital. Your consultants, managers and directors need to have a level of understanding around IR35 as there will be queries from candidates and clients as expected.
- Educating your clients and candidates is key: The IR35 process needs to be slick within your business. The clients and candidates we work with are integral so it is crucial to offer the support and guidance needed to maintain an outstanding service.
If you are a freelancer or an employer seeking some extra guidance around IR35 then get in touch with Lana Furey at Gemini People.
Disclaimer: The information, facts and opinions outlined in this article are correct to the best of Gemini People’s knowledge at the time of publication.