On 5th March the government published a consultation on its plan to extend the public authority IR35 rules to the private sector, excluding small businesses (less than 50 employees, less than £10m turnover). This has ramifications for hirers and everyone in the contractor supply chain.
Tax liability passes to the ‘fee payer’
As with the public authority rules, responsibility for determining the tax status of contractors is to switch from the contractor to the hirer. Tax liability passes to the ‘fee payer’, which, with three exceptions, is the business that contracts with the contractor. The contractor must provide services under contract through the contractor’s business, usually a company (“PSC”) in which the individual owns more than 5% shareholding. The rules apply where the individual would be an employee for tax purposes if the PSC were excluded from the contractual arrangements (‘deemed employee’). If they apply, all income (excluding vat and expenses) paid to the contractor business must be treated as income of the individual. This means that income tax and employee and employer NICs calculated on the full contractor rate must be accounted for by the fee payer. The current 5% expenses allowance for contractors is also to be scrapped.
The exceptions are where there is a chain of supply and the hirer has failed in time to inform the party it contracts with of the ‘deemed employee’ status. Time runs out when the engagement starts (subject to transition rules). Failing to answer questions about its’ determination within a further timescale, or failing to take reasonable care, also results in the hirer becoming the ‘fee payer’, and solely liable.
The consultation suggests various enhancements, including a hirers’ determination is to be passed down a supply chain, liability to pass up the chain where the original fee payer fails to pay HMRC, hirers to set up appeal processes to address issues on assessments.
IR35 status assessment or other options
The rules mean that hirers should carry out an IR35 status assessment before engaging any contractor, or adopt an engagement policy avoiding the use of contractors ‘caught’ by IR35. The assessment is complex and legal. Whilst HMRC provides an online tool (CEST) to assist, it has its limitations, and HR and procurement managers should take care as there is no simple work around. Consequently getting to grips with the issues and the available options should be high on the list of agency and hirer priorities. Towards that end Lawspeed is running a series of IR35 masterclasses over the coming months. We also offer bespoke advice and suitable contracts.
Caution is important and obtaining independent advice more so. There is no silver bullet, and whilst some may make it sound simple, where the hope is to place a contractor outside IR35, assessment of tax risk against the background of a hypothetical employment status is not straightforward. Whilst accountancy “umbrella” organisations have serviced contractors historically, apart from their employment arrangements, those services have been mainly limited to conducting bullet point IR35 contract reviews to help contractors so that they can acquire the contractors business. However the risks for hirers and agencies are entirely different. With various umbrellas moving to capture “IR35” market share, they are unlikely to have the necessary depth of knowledge, legal know how and experience of the industry to be able to assist in a proper advisory capacity, not the least that the organisations’ services will remain predominately to drive traffic to its umbrella and accountancy offerings, so lacking the necessary independence to provide genuine impartial advice.
Seek guidance from independent legal experts
In summary the implementation will affect businesses that use contractors, and higher costs are inevitable. There are options available but the issue is complex and considerations include not only contractual arrangements and tax, but also chain compliance. Best advice must be to seek guidance from independent legal experts, in particular to avoid reliance on businesses involved in the potential hiring chain.
The consultation closes on 28th May 2019.