You may be aware that the new IR35 regime came into force from 6 April 2021, bringing substantial new risks for staffing companies, consultancies and end hirers of Personal Service Companies (PSCs).
The new rules reflect what has been the case in the public sector since 2017 and shift the burden of responsibility for determining employment status from the contractor to the end client. Businesses receiving personal services of an individual via their limited company or PSCs will need to decide whether the relationship is one of deemed employment or genuine self-employment.
If the engagement falls inside IR35, then the contractor is taxed like an employee with income tax and employee national insurance deducted at source via PAYE. Payment of employer national insurance will also be required.
Previously of course, all PAYE risk and responsibility of IR35 was borne solely by the individual’s PSC.
The first step towards assessing these changes is to check if they apply – the regime covers medium and large private sector end businesses and any company (regardless of size) connected with a public sector organisation.
For small business in the private sector, the pre 6 April IR35 rules will continue to apply.
Next, businesses should check their labour supply chains to assess the scale of the potential impact of the rules – do they know which individuals directly or indirectly provide services via an intermediary, and are those services business critical? Some sense checking in terms of making sure that the new rules are understood by those with responsibility for compliance would also be helpful here.
Questions to bear in mind on this would include:
- Are “Statement of Work” models the solution? In some cases, if the models are operated correctly, IR35 will not apply BUT a proper statement of work is a different business model to staffing. It should involve the supply of scoped deliverables rather than time and people and this needs to be got right.
- If an arrangement is determined to be inside IR35, is it worth revising the terms on which a business engages contractors via PSCs on a self-employed basis? For any agencies, the concern will be who picks up the cost of employer national insurance and any apprenticeship levy. This is because the cost falls on the entity operating PAYE, and cannot be deducted from the payment made to the PSC in the same way as income tax and employee national insurance.
- Is moving all former PSC contractors to umbrella companies really that safe? Use of umbrellas is understandable, however there can be serious risks. As an example of this, HMRC’s Spotlight 54 Tax avoidance schemes in 2020 had a focus on some umbrella companies of offshore loan scheme arrangements to pay workers who returned to the NHS to help with Covid. Some (but by no means all) umbrellas undoubtedly do operate risky schemes. Some of these schemes may be deemed to involve attempts to deceive HMRC and as such may well involve criminal tax evasion. There is unhelpfully no statutory approval scheme for umbrellas, so businesses will need to do their own diligence on how workers are paid. Well-established umbrella companies will be happy to co-operate with you when you carry out checks, but beware of those which appear to offer unfeasible tax savings to former PSC contractors and/or do not co-operate.
- Are insurance-backed status checking services the solution? This may look a sensible option, but the devil will be in the detail as some insurance-backed arrangements may create more risk than they solve in an era when HMRC is going to be wanting to get tax from wherever it can.
In conclusion, the use of consultancies needs to be carefully reviewed by businesses. It is not enough to rely on an accreditation, or membership of a trade association, as proof that an umbrella is safe, although of course such membership and accreditation can be helpful.
There are also potentially privacy law issues associated with engaging contractors through new supply chains. One of the most important things to remember is that just because HMRC take no enforcement action relating to the new regime for a few years does not mean they never will.
Many consultancies are aware of this and are taking steps to ensure compliance, but others may even now not yet be ready……
Please drop us an e mail or call if you need any further details or assistance and stay safe and well.