The start date is earlier than you think

[webberg]

There was a discussion on another thread about the meaning of "payment" in the context of the new legislation. Although I assumed that general principles regarding that word as used in taxation would apply, I did say I would go and make some enquiries. I have done that and present my thoughts below.

In very simple terms however, I was incorrect in my assumption and I believe - as postulated by the poster (jamesbrown) who raised the matter - that we should give "payments" a more natural definition.

The new rules refer to all "payments" made after the start date as being within their provisions.

Thus a payment made after 6th April 2020, regardless of the working period it relates to will potentially be seen as income subject to a rate of tax (and NIC) as though you were an employee.

This is going to create some difficult scenarios.

Let's consider the following examples.

Example 1 - you are at Big Co, outside IR35 in March 2020 and remain there after that time, still outside IR35.

Example 2 - you are at Big Co, outside IR35 in March 2020 and remain there after that time, but you are adjudged to be inside IR35 from 6th April 2020.

Example 3 - you are at Big Co, outside IR35 in March 2020 and leave at the end of that month.

Example 1

There will be no change in your gross payments. It will be the case that the agency paying you/your PSC will likely be the "fee payer" and therefore liable to pay tax/NIC in the event that the SDS (Status Determination Statement) is challenged and found to be incorrect. Look out for changes in contract terms that seek to permit the agency to recover this from you/your PSC.

Example 2

Payment made to you after 6th April 2020 will be assumed to be within the new rules and therefore subject to tax/NIC at an employee equivalent rate. The agency/fee payer will be responsible for making this deduction.

This is the case even though the payment may relate to work done prior to 6th April 2020.

This may not be the case where you can show that the role you filled prior to 5th April 2020 and the role after that date were sufficiently different such that they would produce different results for IR35 purposes.

Big Co will be assessing your role in April 2020 and applying the tax rules based on that assessment. If this is a different role, then I cannot see grounds to make deductions.

I do warn you, Big Co and agency, that should HMRC find the resources, this will be a area they will investigate. I cannot for the moment see that this will be worth their while, but we all know that any sensible risk/reward equation has long deserted HMRC.

Example 3

Here I think that as Big Co has no contract to assess, there is no inside/outside IR35 question and therefore no reason to change the manner of the payments made after that date. In other words they will remain free of deductions by the agency.

[swamp]

Some contractors in public sector were paid early because of this problem.

[Maslins]

Another thing perhaps worth mentioning under this thread title is that if for example you're typically on a 6 month contract, that means client's decision on IR35 needs to be actively factored in from contracts starting in Oct 19, meaning discussions taking place in August/Sep.

I wonder if we'll start to see clients offering only 5 month contracts from October, 4 months from November etc. Would be one way of them delaying the need for them to make a firm decision.

[JohntheBike]

There was a discussion on another thread about the meaning of "payment" in the context of the new legislation. Although I assumed that general principles regarding that word as used in taxation would apply, I did say I would go and make some enquiries. I have done that and present my thoughts below.

In very simple terms however, I was incorrect in my assumption and I believe - as postulated by the poster (jamesbrown) who raised the matter - that we should give "payments" a more natural definition.

The new rules refer to all "payments" made after the start date as being within their provisions.

Thus a payment made after 6th April 2020, regardless of the working period it relates to will potentially be seen as income subject to a rate of tax (and NIC) as though you were an employee.

This is going to create some difficult scenarios.

Let's consider the following examples.

Example 1 - you are at Big Co, outside IR35 in March 2020 and remain there after that time, still outside IR35.

Example 2 - you are at Big Co, outside IR35 in March 2020 and remain there after that time, but you are adjudged to be inside IR35 from 6th April 2020.

Example 3 - you are at Big Co, outside IR35 in March 2020 and leave at the end of that month.

Example 1

There will be no change in your gross payments. It will be the case that the agency paying you/your PSC will likely be the "fee payer" and therefore liable to pay tax/NIC in the event that the SDS (Status Determination Statement) is challenged and found to be incorrect. Look out for changes in contract terms that seek to permit the agency to recover this from you/your PSC.

Example 2

Payment made to you after 6th April 2020 will be assumed to be within the new rules and therefore subject to tax/NIC at an employee equivalent rate. The agency/fee payer will be responsible for making this deduction.

This is the case even though the payment may relate to work done prior to 6th April 2020.

This may not be the case where you can show that the role you filled prior to 5th April 2020 and the role after that date were sufficiently different such that they would produce different results for IR35 purposes.

Big Co will be assessing your role in April 2020 and applying the tax rules based on that assessment. If this is a different role, then I cannot see grounds to make deductions.

I do warn you, Big Co and agency, that should HMRC find the resources, this will be a area they will investigate. I cannot for the moment see that this will be worth their while, but we all know that any sensible risk/reward equation has long deserted HMRC.

Example 3

Here I think that as Big Co has no contract to assess, there is no inside/outside IR35 question and therefore no reason to change the manner of the payments made after that date. In other words they will remain free of deductions by the agency.

so do we have actual examples of how these situations might have occurred in the public sector? e.g. has anyone challenged an "illegal" deduction in the Small Claims Court?

[WordIsBond]

I wonder if we'll start to see clients offering only 5 month contracts from October, 4 months from November etc. Would be one way of them delaying the need for them to make a firm decision.

FWIW, I have two contracts (both part time) running past 6 April already. I've told my clients if I don't receive an outside determination on them by 1 February I'll be giving in my one-month notice. If they want to keep me around with an 'inside' determination lurking, or even the possibility of it, we're going to need to renegotiate.

I think it isn't just clients that will be thinking about that deadline and wanting contracts cut off before then. Contractors should be thinking that way, too, IMO.

I think webberg's point is well taken that if you leave before 6 April, there should be no 'inside' determination because none will be needed, but clients are still on the hook for payments made after that date, so I think it is risky to take a contract up to the end and be paid after that. If a client determines, for payments after the changeover, that they are going to treat it as inside I'm not sure you have much recourse that would be worth your time. I want a clean break.

[JohntheBike]

FWIW, I have two contracts (both part time) running past 6 April already. I've told my clients if I don't receive an outside determination on them by 1 February I'll be giving in my one-month notice. If they want to keep me around with an 'inside' determination lurking, or even the possibility of it, we're going to need to renegotiate.

I think it isn't just clients that will be thinking about that deadline and wanting contracts cut off before then. Contractors should be thinking that way, too, IMO.

I think webberg's point is well taken that if you leave before 6 April, there should be no 'inside' determination because none will be needed, but clients are still on the hook for payments made after that date, so I think it is risky to take a contract up to the end and be paid after that. If a client determines, for payments after the changeover, that they are going to treat it as inside I'm not sure you have much recourse that would be worth your time. I want a clean break.

It's not beyond the bounds of imagination that some less well informed clients will not issue a new contract after March but will still deduct the monies anyway.

My current client attempted to change my terms and conditions, i.e. the contract, three days after they explained that there was going to be a change. However, when I pointed out that I required 1 month's notice on the old contract before a new one was issued, they caved in.

The point I'm making is that clients are not necessarily switched on to the finer points of the law. Many years ago, an employer refused to pay me sick pay during a strike. After they received a letter from my solicitor pointing out the provisions of the contract, I was eventually paid.

So I'm expecting some to just deduct the monies after March 2020 without changing the contracts. It remains to be seen what transpires then.

[Maslins]

I think it isn't just clients that will be thinking about that deadline and wanting contracts cut off before then. Contractors should be thinking that way, too, IMO.

"should", yes. However, I anticipate for every contractor who frequents CUK and is clued up on these things, there's probably a hundred contractors who take no interest. Many of them will have been forwarded info re the Apr 2020 changes by their accountant/IPSE/whoever, but either ignored or buried their heads in the sand. First time they'll take it seriously will be when the client says "here's your new contract, and you'll be inside IR35", at which point there will be panic, no doubt with a few snotty emails/calls to accountants "why didn't you warn me about this?"!

[jamesbrown]

Thanks for checking. Taking a pessimistic view, I could envisage a situation where the contracts and WP of all contractors or all contractors within a category are deemed both sufficiently similar and inside IR35 (aka a blanket approach), such that deductions are made even in scenarios that look like example 3. The contractor would then need to attempt to recover the deductions. More importantly, they would also be left in a precarious position, because the payments would say “we, the client, judged your WP to be inside IR35 all along”.

In other words, the pessimist in me says that any such decision by a contractor should be taken significantly before March 2020, depending on payment terms.

[northernladuk]

It's not beyond the bounds of imagination that some less well informed clients will not issue a new contract after March but will still deduct the monies anyway.

My current client attempted to change my terms and conditions, i.e. the contract, three days after they explained that there was going to be a change. However, when I pointed out that I required 1 month's notice on the old contract before a new one was issued, they caved in.

The point I'm making is that clients are not necessarily switched on to the finer points of the law..

Which can work in our favour. If they were very clued up on the points of law their contracts they could easily bypass that months notice period.