The time is drawing ever closer for the UK Off Payroll Working Rules (IR35) to make its mark on the private sector, having been in use within the public sector since 2017. These rules will apply to any individual who is operating as a personal services company (PSC) and is engaged by a medium to large sized business which operates in the UK private sector. For those supporting a small company (as deemed by the Companies Act 2006) it remains the responsibility of the PSC to make their own status determination statement.
The new rules that will apply mean that the end user (the client) will be responsible for assessing the individual’s employment status under the IR35 rules. The business or agency will be responsible for deducting income tax and National Insurance contributions (NICs) via PAYE and will be required to pay employer NICs. We've developed a guidebook to help businesses in the life sciences industry understand how the new rules will affect them.
Estimates vary; however the consensus is that contractors and consultant represent around a quarter of the working population a, spread across both sectors. Within the public sector experience, the new rules have led to multiple requests for increasing rates or moves to permanent roles which reflect the requirements of the legislation.
The focus of most publications and opinions has been toward the contractor (employee-based elements of the changes) however, the costs and responsibilities, which can be significant, are on the employers and should not be underestimated or ignored.
Here are the steps your business should take to prepare for IR35:
Conduct a full review
Review all staff and contractors currently working within your business to try and identify who will be bound by the new rules. A number of service providers have supplied checklists or questionnaires which claim to provide businesses with an in or out determination. Unfortunately, it’s not as simple as that. A ruling by Lord Justice Nolan in the Court of Appeal case Mummery J in Lorimer v Hall said:
“This is not a mechanical exercise of running through items on a check list to see whether they are present in, or absent from, a given situation. The object of the exercise is to paint a picture from the accumulation of detail.”
With Lord Justice Nolan’s ruling in mind, it is the gathering of the data or evidence that will allow you to make the determination. Businesses can use the Check Employment Status for Tax (CEST) service provided by HMRC. This tool has been updated, as previous versions were deemed not fit for purpose. The updated version can be used by workers providing a service, a person or organisation hiring a contractor, or an agency or recruiter that is placing a contractor to help determine whether the off payroll working rules apply.
Key things to consider when checking the status of Contractor:
- What are the Contactor’s responsibilities?
- Who controls the individual (i.e. when, where and how do they work)?
- How they are paid?
- Are they directly in receipt of any benefit or expense?
However, these tests are fallible and gauging by some of the recent decisions seen at the UK’s Tax Tribunals, it would suggest that some may not be 100% effective at determining the correct status in every scenario, which is why additional professional assistance could prove pivotal. This is where Proclinical can assist with the evidence gathering and classification of the required detail.
REVIEW CONTRACTS AND TERMS OF BUSINESS
This is a key element of deciding whether IR35 should be applied. This defines the individual’s independence from the business and whether they are free to pursue other work outside of the company, which is valuable if you’re seeking an outside determination. In essence, this dictates the element of control that a business or recruitment agency has over the Contractor.
Where it is clearly evident that they can apply whatever control required, such as the specific hours worked or the location of work, then HMRC could assume that despite being seemingly self-employed via their own private service company (PSC), they are in fact an employee of the business, whether temporary or not.
Many of these elements of control are often stipulated under a work contract and this document could, therefore, determine whether the off-payroll rules apply. Should you wish to maintain a similar relationship with a contractor, it may be worth reviewing their existing contract, roles and responsibilities to ensure that they are sufficiently distanced from the business so as to be truly self-employed.
CALCULATE THE COSTS
If everything remains the same, the initial perception is that many workers will likely fall in-scope of the IR35 rules. Businesses need to take the time to consider the true cost to their business. A review of the costs, in particular the employer’s National Insurance Contributions (ERNICs), may reveal that it is no longer economically viable to have as many contractors or consultants working under the new rules.
This is where a pragmatic approach could allow your business to effectively land grab the best talent as there will be a number of businesses who will not appreciate the benefits of changing their working practices to allow for contractors to work in a compliant fashion.
Taking a pragmatic approach could allow your business to effectively land grab the best talent
PROTECT THE TRULY SELF-EMPLOYED
HMRC has gone to great lengths to make it very clear that IR35 is not intended to target people who are truly self-employed. There has been anecdotal evidence from many of those caught out by the new rules in the public sector who had previously considered themselves to be self-employed.
This evidence suggests that some large employers have taken a blanket agreement to include all contractors under the rules to avoid a penalty or reputational damage. Unfortunately, for some contractors, this means that they have been unfairly included within the scope of IR35.
Employers should take a cautious approach when applying the rules and take time to identify each person’s status on an individual basis. Applying the rules inappropriately could lead to conflict with key members of staff and has the potential to lead to litigation against a company if a worker feels their new status means that they are unable to work for the business in future.
IMPLEMENT NEW RECRUITMENT PROCEDURES
Consider your position regarding the recruitment of new workers. By being clear from the outset, those applying for a role should be able to appreciate whether or not they are likely to be bound by the IR35 rules and you as an employer can ensure that their payroll is conducted properly from day one. It would be worthwhile that new adverts and those of agency’s that support you make it clear whether the role is for a set contracted period of work and to be conducted by a self-employed individual.
If you begin conducting the necessary checks and putting the correct procedures in place now most employers should be able to avoid any potential liabilities. Also, this will ensure that the contractors that they work with are fully aware of how the change will affect them.
In HMRC’s guidance it is made clear that “the people making the decision should be trained, suitably qualified and understand the rules”
Businesses must not underestimate the impact of IR35 and must begin taking steps now to ensure they are ready to apply the rules from April. Good communication with your contractors and your managers regarding these changes is an important element of conducting all the changes.
In HMRC’s guidance it is made clear that “the people making the decision should be trained, suitably qualified and understand the rules”. They will also need to consider all the facts and speak with both internal and external partners and most importantly, the contractors.
Here at Proclinical we offer a service that will help you demonstrate the use “reasonable care” by correlating all the available data into a pack. Our expertise in interviewing, auditing employment agreements, the understanding of the working practices of both parties with the knowledge around the proposed legislation will provide extremely advantageous. We are able to utilise our specialist skills and expertise in advising both businesses and individuals in relation to the new rules and the steps they need to be taking. To book a free one-hour scoping call please email our team at IR35@proclinical.com.