IR35 - Preparing for April 2020 Presented by · 2 Recruitment and employment law legal consultancy Participated in Agency Conduct Regulations 2003 Managed Service Company Rules 2007

Copyright © Lawspeed 2019 Legal insight, business instinct

IR35 - Preparing for April 2020Presented by

1

2

Recruitment and employment law legal consultancy

Participated in

Agency Conduct Regulations 2003

Managed Service Company Rules 2007

Agency Tax Regulations various

Agency Workers Regulations 2010

IR35 public sector 2017

Employment law and Tribunal consultations - various

Specialism – contracts and advice for recruitment industry

Prevention rather than cure, contract, compliance and services innovation

Copyright © Lawspeed 2019 Legal insight, business instinct 3

Since 1999 IR35 legal services and contracts


Understand IR35, the legislation and what it is

Understanding the governance around the legislation

Who is the decision maker in determining if a new contract role is in or outside the scope?

How this may impact the ability to source permanent talent returning from freelance

Mitigation of risk

Administrative issues and how to practically apply IR35

How to continue using contractors within IR35

What happens to current contractors

How to get around IR35…!!

Today’s targets

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Copyright © Lawspeed 2019 Legal insight, business instinct 5

Some comments

“How to get around IR35

• Don’t attract HMRC’s attention in the first place

• Avoid replacing an employee• Pay for a contract review• Ensure you’re not named in the contract• Secure a ‘confirmation of arrangements’ from the client• Keep a contractor diary• Make sure you are not controlled• Secure a right of substitution and exercise it if possible• Avoid ‘mutuality of obligation’• Keep the client at arm’s length…….”


IR35 – the intermediaries legislation

in place since 2000

tax arrangements for those working through Intermediaries

based on ‘deemed employment status’

Income Tax (Earnings & Pensions) Act 2003

• Chapter 8 (private sector)

• Chapter 10 (public authorities) since 2017

• New Chapter 10 from 6th April 2020

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• Applies to individual personally providing services to a client involving arrangements through a third party intermediary (e.g. PSC)

• Worker would be ‘employee for tax purposes’ if the engagement was direct - test is hypothetical assessment of employment status

• Office holders automatically deemed employees

For original IR35 Individual has a Material Interest in the intermediary - qualified as deemed (new law)

Material interest = beneficial owner or 5%+ interest PSC, 60% in partnership.

Terminology – ‘caught’, ‘outside’, ‘inside’, ‘IR35 friendly’, ‘IR35’

the basics

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Client

PSCintermediary

Individual

Client

RPO

Agency

PSC intermediary

Individual

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IR35 – the original intermediaries legislation Chapter 8

Risk an issue for contractors not employers

Significant financial benefit of falling outside IR35 rules as can clam relief on expenses and be paid by way of dividend

If ‘IR35 caught’ 95% treated as employment income, contractor entitled to 5% top slice exemption

Online calculators suggest difference

£300 per day rate = £750+ per month

£500 per day = £950+ per month

Attractive proposition for accountancy advice and simple contract reviews, leading to ‘serial non compliance’

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Opt out – R.32 Conduct Regulations

Disapplies:

most Agency Conduct Regulations, e.g

Greater transfer fees protection

Can withhold payment if client withholds

Avoids argument over detriment

Timing of contract issue to contractor

Lower risk of employment claims and Agency Workers Regulations claims

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Chapter 8 – PSCs attractive to all parties except

Primary reasons:

• After the event assessment

• After the event tax return

• Significant failure to report by contractors

• Tax avoidance schemes through ‘umbrellas’

Tax loss est. £1.3bn pa by 2023/4

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Chapter 10

• After the event assessment <> Before event

• After the event tax return <> PSC tax return unimportant

• Failure to report by contractors <> No longer relevant

• Tax avoidance schemes <> Defeated?

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Chapter 10 – public authority (Pub A)

Concept applied from April 2017

• Pub A Client makes IR35 status decision

• ‘Fee Payer’ liable for deemed employment taxes

• ‘IR35 caught’ contractor loses 5% expenses exemption

HMRC reports Increased Tax revenue and employees

HMRC now extending to private sector – April 2020

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The TaxesRegardless of decision by the Client – taxes only due when an arrangement is caught

Based on the sum that “can reasonably be taken to be for the services of the worker” - the PSC invoice?

Deduct VAT, materials, allowable expenses = deemed direct payment (DDP)

Deduct PAYE and Employee NICs from DDP and account to HMRC with Employer NICs on the DDP

Pay the net to the intermediary

Effect = increase hirer/agency overhead = employer NICs.

The tax debt arises for any payment made from 6th April onwards

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The deemed direct payment (DDP)

PSC invoice

D1. PAYE and employee NICs

D2.Employer NICs on DDP

total PSC invoice less VAT and allowable expenses and materials = DDP

HMRC receives from FP (with normal payroll return) D1. D2.

PSC receives full invoice and VAT less D1.

Employers NICs = a cost that must be factored in

New Tax application -Calculate on DDP

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Private sector ‘small companies’ excluded from scope

Key criteria 2 out of 3 of the following:

Annual turnover – not more than £10.2million

Balance Sheet total – not more than £5.1 million

Number of employees – not more than 50 (on average)

Note anti-avoidance rules exist to stop group and associated companies from taking advantage

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Concept - as in current Chapter 10

Contractor will no longer be the decision maker

The IR35 decision maker in all cases is ‘the Client’, the recipient of the individual’s services

Simple rule - party liable for the ‘contractor’ taxes is the ‘Fee Payer’ i.e. Client, where the hire is direct,

or

in a chain, the party that pays the PSC in other cases

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Client

PSC

Worker

Client = Fee Payer & responsible for deducting and accounting to HMRC

the Fee Payer? Direct hire

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Client

Agency

PSC

Worker

Agency = Fee Payer normallyClient = Fee Payer if non compliant

the Fee Payer? Recruitment supply chain

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Current rules

(a) Public Authority

(b) Confirmation of decision by the Client

(c) Before supply starts

(d) Inform the party with which it contracts

(e) Information to be passed down chain limited to first party

New rules – Ch10 existing v Ch10 amended

New rules

(a) Pub & Priv sector except small co’s

(b) Same but now called a Status Determination Statement (SDS)

(c) Same and during supply

(d) Inform the party with which it contracts and the worker, with reasons

(e) Information to be passed down entire chain

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New rules – Ch10 existing v Ch10 amended

Current liability

(a) Regardless of decision if arrangement is ‘caught’, tax and NICs payable by Fee Payer

(b) Client liable if no decision, no qs within 30 days or Fee Payer provides decision taken without reasonable care

New liability

(a) ‘Caught’ = Same

(b) Client liable in more circumstances

(c) Client must set up review process on application by contractor

(d) Chain liability for non compliance

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A statement as to whether there is a material interest in the intermediary (s.61U)

> 5% in the intermediary company

> 60% in partnership

Worker must ‘inform’ Fee Payer ‘potential deemed employer’

No confirmation means material interest deemed

Material interest triggers SDS requirement (S.61N)

Fraudulent document issued by worker or intermediary indicating no material interest in intermediary switches liability from Fee Payer to the worker

Consequences? Rule applies to any intermediary

Information from worker

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A statement by the Client that circumstances in s.61M(1)(d)

are met or not met –

• S.61M(1)(d) = assessment of deemed employee under hypothetical direct contract

• To be an SDS it must be given to worker with reasons and made taking reasonable care

Reasons must be relevant from an objective viewpoint, but no case law on this point

Reasonable care – best to assume that applies if reasons given are sensible – do not rely on this argument unless there is an HMRC investigation

The SDS – status determination statement

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Key points

It must be properly formulated – i.e. no reference to “IR35”

The reasons must be clear

Reasonable care must be overt

To be effective it must

Be given to the worker in all cases direct (Client to Worker)

Be given to next party in a chain.

If not valid SDS or not given to worker (including agency/umbrella worker), liability rests with the Client

If not valid SDS or not given to next in chain, liability rests with the Client

The SDS – status determination statement

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New rules – liability where no chain

The only IR35 decision maker on employment status is ‘the Client’

The Client – the person for whom the work is performed or is under an obligation to perform, where services are personally performed by the worker

If no chain the Client is always liable for the taxes unless the worker has provided Client with a no material interest statement

Fraudulent document is the only exception – liability passes to worker

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New rules – liability where chain

Primary liability in a chain relies on the rule: Highest in chain is the Client, lowest is the Intermediary

Fee Payer - is the party immediately above the Intermediary, normally the party that would apply the Taxes, but not liable for the Taxes if it is not a QP

Qualifying Person (QP)

A person given the SDS by a person immediately above – applies down to the Fee Payer (who applies the Taxes rule)

Not a QP if offshore or connected with the worker

Primary liability rests with the lowest person in chain who is a QP

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New rules – SDS issues

If SDS not given to Fee Payer,

• Whilst technically ok for FP to pay gross, no payment of taxes is the red flag for HMRC

• QP above may pay worker services element net (if SDS states ‘caught’) to the Agency = problem

If not valid – defence for FP if FP pays gross - failure to provide valid SDS results in primary liability changing up the line to the Client

Failure to pass on SDS results in primary liability shifting to last QP

Best practice -

Always check the SDS is given and valid

SDS conclusion triggers rate and options considerations

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Client

RPO

Agency

PSC

Worker

Recruitment supply chain

= SDSQP = primarily liable

QP = primarily

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New rules – disagreement

SDS received - agency/contractor unhappy

Caught conclusion – contractor concern

Not caught but likely to be incorrect- more likely agency concern

Representations to Client triggers disagreement process – Client must review and respond within 45 days

Client confirms original decision, or issues new SDS if it changes its view,

Failure to comply results in primary liability passing to the Client

Date of application of a changed decision:

Unclear, but HMRC guidance says original SDS applies during the period of consideration

Argument: SDS will have effect from the date of the original29


liability – outsource

Outsourced decision and decision wrong, i.e. not caught when in fact caught

Client liable unless valid SDS provided

Note where negligence asserted this could conflict with reasonable care taken

Third party more likely to argue ‘not caught’ if self interested

Litigation more likely to ensue from ‘not caught’

Sources of third party reliance

Contractor, recruitment agency, accountancy, umbrella – do not outsource

No harm in client appointing agent, but avoid conflict of interest

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s.688AA ITEPA 2003

Authority for recovery of PAYE from any relevant person that should have been made by another person

‘Relevant person’ is any party to the arrangements

Equivalent NICs legislation likely

Final liability rests with all parties regardless of primary liability

Power to make regulations but no legislation yet drafted

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ConclusionIf conclusion ‘not caught’, risk exists for all in the chain =

Material interest notification essential; SDS essential

Fee Payer (not Client) Defences

• not QP as not given SDS, or SDS was not valid, e.g. Client did not take reasonable care OR arrangement was not caught, i.e taxes were not due to be paid

Investigation = hassle and risk = reflected in company accounts

So only decision maker is the Client, but chain cannot just rely on the Client’s decision

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Apportionment – where arrangement caughtPossible apportionment model for higher paid contractors

Based on the sum that “can reasonably be taken to be for the services of the worker”

Company invoice includes company overhead and charge for company services (e.g. making individual available)

IR35 taxes only apply to services of the worker = normal employment rate

Balance payable gross

Evidence of Client employee rate critical

Contractual terms critical

Savings for both Fee Payer and Contractor

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Apportionment – where arrangement caughtPossible apportionment model for higher paid contractors

Based on the sum that “can reasonably be taken to be for the services of the worker”

Possible to split invoice and pay part gross

Where charge is more than regular employee salary

Requires specific contracts

Significant savings

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Case law

Contracts and actual working practices

Mutuality of obligation

Supervision, Direction and Control

Financial risk

deemed employment status – the decision

Requirements under IR35 Personal service Intermediary Contracts

DifficultiesSubstitution?Company make up?None exist before supply?

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Not caught

Genuine project

Identified piece of work, no ongoing nature, identified end

No ability for hirer to change requirements save within agreed parameters

Business to business commercial contract

Caught

Risk – all other work is time/materials/skillset

Note Danger of alternative interpretations

deemed employment status

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‘Not caught’ – i.e. ‘no employment status for tax purposes’- pay gross Rates unaffected, no change in current payment arrangements Business to business relationship remains in place Gross payments can still be made Happy contractors and clients!

subject to risk of HMRC investigation wherever gross pay

‘Caught’ - i.e. deemed employment status so tax payable

Wholly safe, so long as chain is compliant and taxes are paid, but

Contractor may want to Appeal to client led disagreement process

Rate disagreement

Ongoing contractors as at 6th April may find caught decision affects their previous declared status – this important to recognise

‘Caught’ or ‘not caught’ – status

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Reviews of arrangements must be ongoing

At time of signing off timesheet?

If change from ‘not caught’ to ‘caught’

New SDS assessment required and sent to worker and chain

Terminate the contract as rates and arrangements will be affected, and

Put in place new terms, OR Build auto change provisions into your contract terms

In all cases ensure chain compliance as switch to ‘rules apply’ may result in inadvertent or deliberate non compliance –HMRC investigation

Change to status

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• Threat of employment claim? – all authorities contra this proposition currently

James v Greenwich

Cable & Wireless v Muscat

• Threat exists where change in status decided

• Contractor may have been claiming outside IR35 status previously

• No current law ‘discriminating against a contractor’, nor is one likely

• IR35 applying does not make the individual a worker or employee

• Blanket policy decision is acceptable?

Consequential effect of a ‘caught’ decision

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Our advice –

Avoid Conflict

Use solid expertise where circumstances warrant –employment status is a legal issue

Assess the job, and be realistic

Consider the alternatives

No one wants an investigation = hassle

Outsourcing assessment is not outsourcing risk

A tick box exercise is not enough

Offers of insurance cover may induce risky decisions

Resist temptation to be persuaded to declare ‘outside’

making the decision – the starting point

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CEST and other toolsDoes CEST help? https://www.tax.service.gov.uk/check-employment-status-for-tax/

Evidence only required where decision is ‘not caught’, but helpful to persuade contractors that arrangement is ‘caught’

If project arrangement - could provide supportive evidence

Genuine attempt to assist

Every tool depends on subjective input from Client which may not be complete

HMRC reserves right to argue that incorrect information was input

No tool assesses the contracts, which could affect the outcome, but contracts should reflect the arrangements

To be valid throughout all require ongoing use for each payment in case circumstances change

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https://www.tax.service.gov.uk/check-employment-status-for-tax/setup

https://www.tax.service.gov.uk/check-employment-status-for-tax/


Offsetting liability in contract terms

Factors

Clients will want full indemnities, but as they make decision agencies will want to resist

Mutual trust

Old mindset versus new

Only circumstances where liability arises are where Client indicates ‘not caught’?

Contracts

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Contracts

Agencies – want to avoid liability so strike fair balance

process to enable engagement of contractor

proper description of job where ‘not caught’ decision

certainty on rates

limited and fair indemnities

flexibility if status changes

transparency on decision making

Both parties – clauses in contracts will affect assessment by the recipient of options

The more liability an agency accepts, the less risk it will likely take on, i.e. not caught assessment

Unless…….

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Contracts

HMRC indicates best way to address the issues is by ensuring chain compliance

Looking ahead key factors for agencies and hirers:

Evidence of own compliance including

• Process for review of contracts

• Understanding of tax rules

• Avoidance of tax schemes

• Clarity on when SDS is required and who it should be given to

Evidence of compliance by third parties

Best practice – audit or get accreditation

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Direct hire – caught arrangement

switch from PSC to direct employment

Pros – no IR35 risk, no SDS requirement

Cons – employment rights and argument employment continuous

– rate adjustment

Options

continue to use PSC and meet NICs – caught

Pros - no risk,

Cons - possible dispute with contractor, rates

continue to use PSC and apply apportionment model - caught

Pros - lower risk, rate less affected? In practice no SDS requirement

Cons – risk still exist on company payment, lower risk dispute with contractor

May affect agency introduction margin only direct hire fee

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Options

Direct hire – caught arrangement

switch from PSC to umbrella engagement

Pros – low IR35 risk –

Cons – compliance check and worker material interest confirmation still necessary

commercial contract required, rate adjustment

PLUS loss of control - confidentiality, expenses and tax compliance, offshore/tax avoidance schemes, data protection, agency worker regulations, agency conduct regulations, umbrella charges, higher employment claim risk – is the umbrella a real employer?

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Options

Direct hire – not caught arrangement

Contract with PSC

Undertake status assessment and rely on ‘outside’ result

Pros – rate remains as before

Cons – assessment may produce incorrect ‘not caught’ result

risk of tax investigation

cost of assessment and ongoing checks

insurance cover may be a lure not a protection

essential advice suitably qualified and reliable

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OptionsConsultancy solution

Work undertaken by consultancy using PSC contractors

Requires specific consultancy contracts

Pros – IR35 responsibility and liability shifted from Client to consultancy which is then ‘the Client’, so Client is no longer liable

Cons – risk that HMRC considers end user still liable as Client

evidence required to support as only relevant where IR35 taxes due

contracts required - must be watertight reflecting the reality

consultancy model is not regulated employment business

separate non agency insurance for work required

Conclusion – a possible solution for project workforce

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Options

Agency (employment business) solutionsPSC – agency contracts with PSC as before on IR35 ‘not caught’ basis (assuming supportive SDS and worker confirmation provided)Pros – agency is Fee Payer, primarily liable, rates remain as beforeCons – high risk of investigation

– compliance check and contract indemnities critical– avoid use of PSC unless satisfied that arrangement is

definitely not caught or, if caught, that agency is paying in accordance with the tax rules– Compliance essential

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OptionsAgency (employment business) solutions

PAYE – engage on a contract of employment or contract for services, or uses umbrella (subject to umbrella issues)

Pros – no tax/ employment claims risk

– provides a work finding service, conduct regulation compliance

– helps with AWR advice and overall engagement management

- ‘no material interest’ rule applies, otherwise rules do not apply

- manages umbrella relationship (if any)

Cons – rates affected as employer NICs negates margin

worker entitled to agency worker rights

Conclusion – without umbrella = safest route as taxes paid and agency regulated, subject to client driven compliance checks

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Recommended actions for HR: Assess the job

If likely to be deemed employment, consider all options and act accordingly

Ascertain if intermediary, if none then rules do not apply

Umbrella is an intermediary, as is agency

Ascertain if worker has material interest and obtain statement from worker if direct, or confirmation from agency that agency has statement from the worker – possibly obtain copy statement

If no statement from worker assume material interest

If statement obtained or deemed create SDS and give to worker

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Steps to get ready Reality is that most contractor arrangements are caught Focus on those that may not be Make a policy decision on the option you wish to use For those that you wish to retain as PSCs, whether direct

or via an agency take recommended actions

Actions recommended: If SDS indicates ‘caught’ review contract requirement and

whether intermediary allowed or not, if not, obtain evidence from agency throughout engagement that no intermediary other than agency

If decision is to allow Agency or other intermediary give SDS to worker

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Steps to get ready If SDS is ‘caught’ and engagement is direct, pay intermediary

in line with rules IF SDS is ‘caught’ and there is a chain

ensure SDS compliance down the chain via contract terms and indemnities

ensure Fee Payer pays in line with payment rules, consider continuous verification, e.g. checking payslips

If SDS indicates ‘caught’ review contract requirement and whether intermediary allowed or not, if not, obtain evidence from agency throughout engagement that no intermediary other than agency

If SDS is ‘not caught’ and engagement is direct, pay intermediary gross

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Steps to get ready If SDS is ‘not caught’ and there is a chain

give SDS to next in line ensure next in line passes on SDS

Check conditions for ‘not caught’ SDS do not change If conditions change, review SDS and issue new one if

appropriate to worker and next in chain

For existing intermediaries where there is a material interest, e.g. a PSC due to run over 5th April 2020 Undertake job assessment as soon as possible, and prior to

the date If likely to be ‘caught’ inform worker and consider all options

in accordance with main recommendations Note that a formal caught assessment made from 6th April

2020 may impact on contractor’s pre April 2020 IR35 status.

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Grey areas

Avoid silver bullet suggestions , e.g. substitution, or interposing accountancy will accept liability, discussion about direction, supervision and control

• Avoid arguments re reasonable care – for agencies it is only a defence to liability when HMRC is investigating an ‘outside’ decision

• Avoid offers of multiple contract reviews – if one is needed there is risk and cost.

• Remember claimed IR35 insurance requires annual premium and may not be effective in 3 – 6 years time

Use indemnities only as the fall back

Prepare now

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Familiarise with related regulations

Agency Worker Regulations 2010.

These include

Understanding the qualifying period of 12 weeks continuous engagement

The rights a worker is entitled to for Equal terms and conditions including pay as in use by the Client Access to facilities provided by the hirer

Recognising the responsibilities an agency has Recognising the responsibilities an umbrella company has

Prepare now

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Contracts for contractors, agencies, umbrella

Proforma SDS

Proforma worker statement

IR35 assessment

Project description review

Contract and working practices assessment

Training/briefing

Chain compliance audit – agencies and umbrellas

Helpdesk

Lawspeed IR35 services

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Engagement contracts, employment and commercial

Employment, regulatory and tax status advice

In house training, masterclasses, webinars

Compliance auditing

Lawspeed group services – here to help

Independent Accreditation for recruitment companies

Standards set by industry stakeholders Audit establishes quality businesses CCS & NAHT approved education

Agency and HR platform Manage all your engagement contracts in one

place Control, issue and update terms, from anywhere Check usage, templates and history for ever Managed or own contract option

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Lawspeed group services – here to help

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[email protected] 236236

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Documents

IR35 - Preparing for April 2020 Presented by · 2 Recruitment and employment law legal consultancy Participated in Agency Conduct Regulations 2003 Managed Service Company Rules 2007