1

IR35Recruiter’s

guide to

Understanding IR35 itself can be a challenge, however, add in regular legislation updates and it can become a bit of a minefield. It’s also likely that you’ll receive questions about IR35 from contractor and freelancer clients. But just what is IR35, why does it exist, what are the penalties and most importantly – how do the private sector reforms affect you as a recruitment agency?

Read on as we answer these questions and more in our simple guide to IR35 for recruitment agencies.

What is IR35 and why was it established?IR35 is a piece of tax anti-avoidance legislation which targets Personal Service Companies (PSCs) and was established by the government to combat “disguised employment”. It provides guidance to contractors on how to operate for tax purposes for each contract.

HMRC have developed a set of standards to assess employment status and if contractors operate in a

manner with the same level of risk, responsibility, liability and control as an employee or office holder, it is likely that they will be deemed inside IR35.

What is disguised employment? Disguised employment is an arrangement which appears to be designed to avoid PAYE tax on the part of the contractor, and National Insurance contributions on the part of the client.

What happens if a contractor is caught inside IR35? If a contractor’s working practices are determined as being inside IR35, they can continue to work in the role, however, they will be liable to the same tax and National Insurance contributions as an employee. It will also limit the number of expenses which they can claim.

IR35?What is

3

T A B L E O F C O N T E N T S

03

10 12

16

14

17

15

04 06 08

What is IR35?

Transfer of liability Should I keep my company open?

Am I inside or outside of IR35?

Summary

Next Steps

Why choose Parasol & ClearSky

IR35 reform in the Private Sector

Factors to determine IR35

Options for End Hirer if IR35 applies

What was announced? At the 2018 Autumn Budget, the Chancellor of the Exchequer announced what many in the contractor supply chain suspected; that the same IR35 reforms which were rolled out to the public sector in April 2017 would indeed be rolled out to the private sector from April 2020.

The reform centres around the ‘off-payroll’ Public Sector rules being extended to medium and large private sector businesses from April 2020.

How we expect the IR35 reforms will workWhilst there are still some aspects of the reform which will be ironed out and confirmed after the consultation, we expect that the “off-payroll” reforms will largely mirror public sector rules.

For example, the Public Sector rules are:

• If a worker has been engaged directly, the responsibility for determining whether the worker should be regarded as an employee for tax purposes will transfer from the director to the end hirer.

• Should there be another party in the supply chain (such as an agency) who pays the contractor, the end hirer will advise them of their decision on IR35 status before the start of the assignment.

• Unless the public sector organisation has not used ‘’reasonable care’’ to arrive at its IR35 status decision, if the engagement is determined to be inside IR35, the party who pays the PSC (known as the ‘’fee payer’’) is treated as the employer for tax purposes. This would mean that the fee payer is responsible for accounting for and paying the income tax, NICs (employees and employers) and apprenticeship levy (if applicable) under PAYE to HMRC before making the net payment to the PSC. No employee rights are conferred to the worker.

• If the engagement is determined to be outside of IR35, the fee payer will continue to pay the PSC gross and the contractor can continue to operate as normal.

What we don’t know yet Until the consultation is complete, there are some aspects of the off-payroll reforms which we’re unsure of such as: • Whether the CEST Tool and HMRC’s guidance can be

improved to reflect a wider and more diverse private sector.

• The Government intends to place greater emphasis on the reasonable care that end hirers must take in making IR35 status determinations and further explore the implications for businesses that do not. However, what ‘reasonable care’ will constitute and the consequences for not taking reasonable care are yet to be seen.

• The Government have stipulated that they do not intend to make the reform retrospective and it has said that they will not carry out targeted, retrospective campaigns where contractors start paying employment taxes under IR35 for the first time. There is not yet any categorical assurance that this will not take place.

• In the public sector, the rules are not explicitly clear on whether the ‘fee-payer’ (for example, the agency) must follow the decision of the end hirer even if they disagree with the IR35 status decision. We expect that this will be made clear in the consultation that the ‘fee-payer’ must always follow the end hirer’s decision.

• How contractors can challenge an IR35 status decision made by the end-hirer is still not clear. HMRC have acknowledged this and will look to set out a process and further guidance in the future.

• The Government has said that it is considering “what enhancements should be made to the information customers provide to HMRC regarding payments to personal service companies.” Exactly what end hirers and agencies can expect in terms of additional record keeping is yet to be seen.

in the Private Sector IR35 Reforms

4 5

Factors and evidence that determines IR35 status

ControlOther Factors

Part and Parcel?Is the contractor treated or do they act like an employee? (e.g. access to employee benefits, facilities, functions, performance bonuses; line management; appraisals; rolling contracts; business cards; org. charts; etc.)?

In business on your own account?

Carry Financial Risk?

Own Equipment?

Intention of parties?

Confirmation of arrangements?

Personal Service or Substitution

• Is the contractor obligated to provide their services personally?

• Does the contractor have an unrestricted right to send a substitute subject to necessary qualifications and experience to carry out work?

• Is the contractor responsible for sourcing and paying the substitute?

• Does the client have the right to refuse the substitute?

• Is the right to substitute legitimate?

• Is the client obligated to provide work?

• Is the contractor obligated to accept work?

• Is there an obligation to work out termination periods?

• Can the contractor finish up once the work is completed?

• Is the payment based on time or body of work?

Mutuality of Obligation

How • Control over the manner

in which the work is completed?

What

• Working a project or role?

• Can the client move work?

When • Choice over hours?

• Need consent for time off?

• Any restrictions on days and hours?

Where• Choice over where work is

carried out?

6 7

Options for end hirer if IR35 applies Outside IR35

After changesOutside IR35Before reforms

VAT

Income and corporation

tax

Net Income

Net Income

Option one

Engager Contractor Gross Pay

VAT

Option two

Option three

Option four

VAT

Income and corporation

tax

Net Income

PAYE and Employee NI

Net Income

PAYE and Employee NI

Net Income

Employer NI

VAT

PAYE and Employee NI

Employer NI

Employer NI

Employee benefits

VAT

PAYE and Employee NI

Net Income

Employer NI

Outside IR35After changes

Outside IR35Before reforms

VAT

Income and corporation

tax

Net Income

Net Income

Option one

Engager Contractor Gross Pay

VAT

Option two

Option three

Option four

VAT

Income and corporation

tax

Net Income

PAYE and Employee NI

Net Income

PAYE and Employee NI

Net Income

Employer NI

VAT

PAYE and Employee NI

Employer NI

Employer NI

Employee benefits

VAT

PAYE and Employee NI

Net Income

Employer NI

With our new “Business Impact Tool”, you can understand the financial effects that IR35 can have on your recruitment agency. To book your free consultation with one of our expert team, call 01925 644 474

8 9

Following the IR35 reforms you’re likely to have questions around what it means to you if a contractor is deemed to be inside of IR35. But no need to worry, as always, we’re with you all the way and have put together some of the options of how you can structure the payments of contractors.

Outside IR35This is the preferred option as there is no employer NI for the end hirer and the contractor can optimise their income for tax. This may or may not require changes to the ways of working between the end hirer and the contractor.

Inside IR35 Option one – the end hirer bears the costs of VAT and employer NI only

Option two – the contractor bears the cost of employer NI (and PAYE and NI)

Option three – the contractor becomes a temporary employee where the engager bears the costs of employee benefits and employer NI

Option four – the end hirer keeps the contractor whole so no impact for the contractor

Client Agency 1 Agency 2 Agency 3 Fee-payer PSC

Transfer of Liability1. Status determination flows down

contractual chain2. Agency 3 fails to share the status

determination with the fee-payer

3. The liability initially sits with Agency 3

4. If HMRC fail to collect the liability from Agency 3, the liability transfers directly back to Agency 1

5. If HMRC fail to collect the liability from Agency 1, the liability finally transfers to the client

Contractual chain

Action required

Proposed change (tax liability)

10 11

Tax planning

Expenses

The expenses that can be offset against a company’s profits may be broader than those that may be claimed by an employee providing opportunity for potential savings.

Pensions

Rather than an employee director funding pensions out of taxed income, the company can make pension contributions. A company will often be able to make a higher tax relievable pension contribution than an individual and contributions will usually be a tax deductible expense for the company. It should therefore gain Corporation Tax relief against the value of the contribution.

For a caught engagement - contractors and other service companies which receive income caught by the rules of IR35 must carry out a deemed salary/Schedule E calculation each tax year. This calculation is based on the income received once deductions and employer’s National Insurance Contributions have been taken.

A 5% allowance for operating expenses is currently available to contractors working in the private sector (this may not be the case though following roll out of the changes to IR35 for the non-public sector), whereas if operating through an umbrella, this allowance does not apply. This 5% allowance is a flat rate deduction of the contractor’s income for general expenses.

Remuneration

If the clients caught contract is short term, there may be a possibility that future contracts are not caught engagements that allow them to take advantage of planning for remuneration i.e. take the balance of remuneration as dividends, which may be taxed at a lower rate than salary and are not subject to National Insurance Contributions. Dividends are paid out of the company’s profit after corporation tax has been deducted.

Openor Close?Understandably, a client may be a little sceptical about keeping their limited company open if their current engagement is deemed as being inside of IR35. We’ve looked at some of the important factors and considerations for contractors to make when deciding whether to continue working through their limited company:

Credibility

The formation of a limited company can provide end clients with confidence that the business is permanent. Further, many large companies will not deal with unincorporated entities so formation can be an important key to securing opportunities and growth.

Liability

Shareholders liability for the debts of the business are capped to the amount paid for their shares plus any unsecured loans made to the company. For employees, of course this point is mute in that the employee would be covered by the employers insurance. Nevertheless, if a contractor closes their company, they may choose to operate self-employed as well as employed through an umbrella. In contrast to a limited company, partnerships/sole traders are personally liable for all debts of their business. This is an important consideration for those flexible workers that may have one contract deemed inside IR35 but know that they will be working again in the future on a contract that may not be caught as inside IR35.

Future planning

A company is a separate legal entity – so it may be easier to raise finance to expand, it can survive the death of an owner or be sold and/or its owners benefit from Entrepreneurs relief against capital gains tax.12 13

Outside IR35 If contractors are confirmed to be exempt from the IR35 legislation, then:

They can set their salary at whatever level they wish to, and in most cases, contractors will choose to structure this in a way that works out most beneficial for them in terms of take-home pay. By taking a lower salary to pay themselves from their limited company, this frees up their basic rate tax band in which they can top up their income with dividends (these are taxed at 7.5% as opposed to the basic rate salary of 20% or higher rate which is taxed at 32.5%).

Inside IR35If contractors are found to be caught by the legislation, then:

The contractor must take what is referred to as a ‘deemed salary’ payment from their company i.e. the income that their company receives for the service they are providing is paid out entirely as salary, after a 5% allowance for expenses (non-public sector only). As mentioned above, the tax rate on a salary payment is 20%, therefore the tax costs of being caught by the legislation can be significant. Tax and NIC are also deducted at source.

A popular question we’ve probably heard a thousand times but one that’s critical.

We’ve put together a concise overview to help you understand what it means for the contractor in each scenario.

Next stepsWith these all-important changes coming into the private sector in April 2020, what can you do to make sure you’re well prepared? Take a look at our easy to follow considerations to help:

• Agencies and end hirers should use this time wisely to prepare for implementation in April 2020.

• End hirers must ensure they are in a position to make accurate status assessments and avoid a blanket approach.

• A coordinated effort between all parties is required to drive compliance, whilst avoiding any associated disruptions to businesses.

• In order to provide a smooth transition, the steps that agencies and end hirers impacted should take to compliantly engage their contingent workforce include:

• Identify the population of workers in scope; undertake a full impact assessment on their business; and develop and implement a robust process for making correct status assessments.

• Review the day-to-day working practices and contracts throughout the labour supply chain.

• Consider whether any changes to contracts or working practices throughout the supply chain are necessary; seeking to redraft, restructure or renegotiate arrangements where appropriate.

• Businesses should also ensure that payroll software is able to cope with the changes.

• Select the right IR35 specialist to steer their business through the changes.

• Visit our website or book a consultation by calling 01925 644 474 to see how our business impact tool can help determine the IR35 status of your contractors.14 15

Why choose Parasol & ClearSky Contractor AccountingAt Parasol and ClearSky Contractor Accounting, we’ve been supporting contractors, agencies and end-hirers for over 18 years.

Compliance is at the heart of everything we do and our goal is to always do what is right, not just what is easy. But don’t just take our word for it. If you’re looking for an IR35 specialist to help guide you and your contractors through the upcoming reforms, our stats speak for themselves:

16 17

SummaryWe realise that we’ve gone over quite a bit in this guide so to refresh your memory on all the important things, we’ve put together the below key points:

• The IR35 reforms in the Private Sector won’t be launched until April 2020

• The reforms will only affect medium and large businesses within the Private Sector

• Not every aspect of the reforms have been confirmed, however further consultations during 2019 will aim to confirm how the reforms will work

• Contractor clients can still benefit from working as a limited company director

• Use the time between now and the reforms coming into place to get yourself and your clients prepared

• Parasol and ClearSky are with you every step of the way

Multiple UK office locations and over

600 head office staff

Working with over

2,500recruitment

agencies across the UK

Managed payments and

accounts for over

100,000contractors

Specialist team of compliance

& legal expertsto keep abreast of legislation changes

Founding member of the FCSA, which is fully

audited YoY by Ernst & Young

Account management and

best advice team of over

50 contractor specialists

including 20 partner managers

18

Talk to an expert

For any questions around IR35 or to book in a consultation, call 01925 644 474.

parasolgroup.co.uk

clearskyaccounting.co.uk