1CLIFFORD CHANCE |

IR 35 London Market Briefing

Andrew Patterson of Clifford Chance

Seb Maley of Qdos Consulting

Kenneth Underhill of ICSR

NEW OFF-PAYROLL WORKING RULES (“IR35”) APPLICATION TO PRIVATE SECTOR

ANDREW PATTERSON

CLIFFORD CHANCE

15 JANUARY 2020

3CLIFFORD CHANCE |

WHAT IS THE IR35 REGIME AND WHY DO WE HAVE IT?

• an individual personally performs services for a client (or is obliged to do so);

• those services are provided under arrangements involving an ‘intermediary’ (such as a PSC); and

• if the arrangement had been made directly between the individual and the ‘end user’ or client, then the individual would be ‘deemed to be an employee’ for tax purposes.

NEW OFF-PAYROLL WORKING RULES (“IR35”) APPLICATION TO PRIVATE SECTOR

IR35 Regime

introduced in 2000.

IR35 Regime

applies if:

Aims: to crack down on

perceived tax avoidance

where services are provided

through an intermediary

company like a personal

service company (‘PSC’).

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WHAT’S THE CURRENT POSITION FOR THE PRIVATE SECTOR?

Obligations sit with the PSC to:

– determine the status of the relationship; and

– account for income tax and NICs on salary payments made to its

directors/owners.

Agency/entity that contracts with PSC is currently under no

obligation to deduct tax/NICs.

NEW OFF-PAYROLL WORKING RULES (“IR35”) APPLICATION TO PRIVATE SECTOR

Current rules

for private sector

companies:

5CLIFFORD CHANCE |

WHAT’S CHANGING?

NEW OFF-PAYROLL WORKING RULES (“IR35”) APPLICATION TO PRIVATE SECTOR

In July 2019 the

draft Finance

Bill 2020 published:

• extends the public sector off-payroll working rules

to large and medium-sized companies in the

private sector and introduces new features

• takes effect from 6 April 2020

• final legislation still outstanding (expected as part

of budget)

• HMRC has published a summary of responses to its

consultation process, explanatory notes and a policy

paper and fact sheet. More guidance is expected

• Government review announced on 7 January 2020.

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WHAT’S CHANGING?(CONTINUED)

NEW OFF-PAYROLL WORKING RULES (“IR35”) APPLICATION TO PRIVATE SECTOR

The Key changes are:

• responsibility for determining deemed employment

status will sit with the client (or ‘end users’) and not

the PSC;

• responsibility for deducting income tax and NICs if

‘inside’ IR35 will sit with the company nearest the

PSC (the ‘fee payer’ or ‘deemed employer’);

• “information flow” changes; and

• introduction of a new client-led appeals process on

employment status determination.

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LIABILITY FOR NON-COMPLIANCE

• New power to allow for the transfer of liability in the event of non-compliance

elsewhere within the labour supply chain.

• Could result in the client/end user (and others) being liable for the default of

others within the chain.

• Consultation response – clients/end users and first agents are considered

best placed to ensure compliance within the wider labour supply chain.

• Further guidance is expected from HMRC on this in due course.

• Powers are not intended to transfer liabilities in ‘cases of genuine business

failure, where deliberate tax avoidance has not occurred.’

NEW OFF-PAYROLL WORKING RULES (“IR35”) APPLICATION TO PRIVATE SECTOR

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WHAT CAN COMPANIES DO NOW TO PREPARE?

Companies might want to consider:

• auditing their staffing arrangements to identify engagements with PSCs and

any other entities within the labour supply chain.

• is there a due diligence process in place in relation to the labour

supply chain?

• review of processes (procurement, HR, tax and line management) to

determine IR35 employment status

• internal training on IR 35?

• no ‘blanket’ procedures

• process for ‘Information Flow’ on deemed employment status

• process for a client-led ‘disagreements process’

• review of internal/current payroll and onboarding policies

• risk management: should the way in which workers are engaged change?

NEW OFF-PAYROLL WORKING RULES (“IR35”) APPLICATION TO PRIVATE SECTOR

9CLIFFORD CHANCE |

CHANGES TO CONTRACTUAL DOCUMENTS?

Are amendments needed to supply, consultancy

and other contractual arrangements (whether at the

PSC level or other entities within the supply chain)?

Key contractual concerns to consider:

NEW OFF-PAYROLL WORKING RULES (“IR35”) APPLICATION TO PRIVATE SECTOR

a requirement for

entities within the labour

supply chain to provide

sufficient (and accurate)

information to enable the

client/end user to make

the status decision (and

indemnity protection where

this is not done)

review of any

clauses that may

suggest the client/end

user has control

of the worker

indemnity protection

in the event of

non-compliance of other

entities within the labour

supply chain

an explicit right

to deduct and

withhold tax from

any fees paid

Clifford Chance, 10 Upper Bank Street, London, E14 5JJ

© Clifford Chance 2020

Clifford Chance LLP is a limited liability partnership registered in England and Wales under number OC323571

Registered office: 10 Upper Bank Street, London, E14 5JJ

We use the word 'partner' to refer to a member of Clifford Chance LLP, or an employee or consultant with equivalent standing and qualifications

WWW.CLIFFORDCHANCE.COM

11CLIFFORD CHANCE |

IR35:THE OFF-PAYROLL RULES

Seb MaleyCEO

12CLIFFORD CHANCE |

Leadingauthority on the IR35 legislation

1,600+ IR35 cases successfully

defended

3000+ IR35 reviews every

month

Tax consultancy

by origin

Assisted numeroushigh-profile public sector

bodies in managing reform

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THE PROBLEM WITH IR35

⚫ Requires significant, specialist resources within HMRC to police

⚫ Enquiries take 18 months+ to conclude

⚫ HMRC have a poor enquiry record

⚫ Expectation that reform will cause ‘self policing’ of IR35

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⚫ Qdos have represented contractors in over 1,600 IR35 enquiries, of which only 3

have been found to be inside IR35

⚫ HMRC have only won 1 of the last 14 IR35 tribunal cases

MYTHS & MISINFORMATION

“90% of contractors should be inside IR35”

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⚫ All historic case law still stands

⚫ Cases will still be determined in the way they always have

⚫ A CEST result is not a conclusion on a worker’s status

“IR35 is a new legislation”

MYTHS & MISINFORMATION

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IR35 STATUS TESTS: KEY FACTORS

Right of Substitution

ControlMutuality of Obligations

Financial Risk

Part and Parcel

Genuine Business

Exclusivity

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THE CONTRACTOR’S PERSPECTIVE

- Contractors are well versed in IR35 (generally)

- Aware of what happened in the public sector

- Taking action to safeguard their status

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THE FINANCIAL IMPACT - £500 PER DAY

£33,088

£76,912

LTD COMPANY

£45,408£64,59

2

UMBRELLA

TAKE HOME PAY DEDUCTIONS

19CLIFFORD CHANCE |

THE RETROSPECTIVE RISK

“Organisations’ decisions about whether workers are within the rules will not automatically trigger an enquiry into earlier years.”

- Despite HMRC’s statement contractors remain concerned

- An ‘inside’ determination is ready made evidence for HMRC

- Some instances of retrospective tax demands in the public sector

- Contractors advising each other to leave before inside determination is made

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WHAT ACTION MIGHT CONTRACTORS TAKE?

Challenge risk-averse IR35 decisions

Leave roles where unfairly placed inside IR35

Raise rates if placed inside IR35

Seek only outside IR35 roles

21CLIFFORD CHANCE |

WHAT ACTION MIGHT CONTRACTORS TAKE?

- Susan Winchester claimed unpaid holiday pay having been determined inside IR35

- Tony Elbourn won a claim for unlawful tax and NIC deductions having been determined as inside IR35 by the Met Office. CEST result overturned by tribunal judge

- Reports of contractors taking agencies and clients to the small claims court for loss of earnings

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HOW ARE PRIVATE SECTOR FIRMS FEELING?

- ‘Negative’ reactions from Lloyds, Barclays, HSBC, Tesco Bank

- Push from some clients to consultancies and SoW

- Hundreds of firms looking to assess contractors fairly and individually

- Some see it as an opportunity to attract talent

- Early engagement is key

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- Negative initial reaction by TfL – all workers must be PAYE

- Qdos conducted sample testing of selection of workers

- All contractors individually assessed

- Over 85% found to be outside IR35

CASE STUDY

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SUMMARY

- Companies can manage IR35 reform

- There are alternatives to HMRC’s CEST tool

- Most firms understand the importance of retaining contractor population

- A large proportion of contractors are genuinely outside IR35

- Kneejerk reactions may be short-lived

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www.qdoscontractor.com

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IR 35 How We Can Help

Kenneth Underhill

27CLIFFORD CHANCE |

Who We Are

• ICSR is a consultancy with a core employed team and a Talent Pool of about 20 people able to help clients together with

other specialists.

• Our approach is different:

• We all come from the industry and almost all have more than 15 years experience working for brokers, insurers,

Lloyd’s Syndicates and MGAs.

• We are focussed on finding client solutions for clients

27www.icsr.co.uk

Kenneth Underhill

25+ years – AGC

Heath Lambert,

Partner RPC and

GC of ACE/Chubb

Jason Jones

25+ years – 19 at

Hiscox leading

Compliance and

Internal Audit

John Moffatt

35+ years – Head

of Compliance at

Atrium, Beazley,

CV Starr,

Riverstone etc.

• Our underlying philosophy is to use our experience to pragmatically help clients remain up to date, remediate issues

or continue their corporate evolution by providing the advice and support necessary to get the job done efficiently and

effectively.

• We have grown 440% in less than two years on the quality of our service and our reputation.

Our Directors

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How We Can Help – Options

28www.icsr.co.uk

Advice:

• Our employees

• Talent Pool Members under contract

Project work:

• Our employees

• Talent Pool members under contract

• Talent Pool members on FTCs

Resource and Advice:

• Our employees

• In some circumstances Talent Pool members under contract

• Talent Pool members on FTCs

Pure Resources:

• Our employees

• Talent Pool Members on FTC

29CLIFFORD CHANCE |

How We Can Help – Available Skills

29www.icsr.co.uk

Significant compliance and risk experience including former heads of compliance and risk functions capable of evaluating and restructuring functions and frameworks

Significant operational experience including heads of operations involved in the development of target operating models for firms, change programmes, management of functions and offshoring projects

Teams with significant transformation project experience dealing with:

•Compliance and regulatory projects including responding to S.166 reviews and remediation projects covering governance, conduct risk, culture, controls on underwriting & claims, sales practices and ICOBs, licensing issues, financial crime etc

•Solvency II Internal Model development and IMAP

•GDPR implementation

•ORSA framework implementation

•SMCR framework implementation

• IDD implementation

•Operational resilience projects

•Environmental impact assessment projects

Project and programme managers

Business analysts

30CLIFFORD CHANCE |

Company Registration No. 10584036. Registered Address: 33 Queens Road, Brentwood, Essex CM14 4HE

QUESTIONS ?

31CLIFFORD CHANCE |

Thanks Keep in touch

or drop me a line

kenneth.underhill@icsr.co.uk

07715 655745

www.linkedin.com/company/implement-compliance-solutions-

resources/www.icsr.co.uk