IR35 reform FAQs: Your April 2020 off-payroll queries answered
Liability might be the most important issue facing the contractor industry as private sector IR35 reform fast-approaches, but it is only a single aspect of April 2020’s significantly vast new framework.
An industry roundtable event we hosted made this point crystal clear, writes James Medhurst, senior associate in the employment team and Matthew Sharp, senior associate in the dispute resolution team, of law firm Fieldfisher.
It is from that event that we have drawn out the genuine concerns of attendees to produce the 10 most frequently asked questions about off-payroll working in the private sector, effective in a little over 17 weeks’ time.
1. Is the politically uncertain climate, with Brexit and a general election, likely to impact IR35 reform’s introduction?
The draft of the Finance Bill 2019 is working its way through parliament, so there could still be changes to the IR35 provisions before the bill comes into force (which is, as things stand, still anticipated to be April 6th 2020).
However, the legislation itself is not controversial, and there is general consensus that exploitation by Personal Service Companies (PSCs) needs to be addressed, so it is unlikely that the proposals will be scrapped.
HMRC also anticipates significantly increasing its tax receipts (approximately £3.12 billion between 2020 and 2024) by reforming these tax rules for off-payroll workers.
Additionally, this is not a new policy. The reformed IR35 rules requiring end-users rather than contractors to decide contractors’ IR35 status came into effect in April 2017 for public sector end-users. Next April's changes will align the public sector’s IR35 framework with the private sector’s IR35 framework.
2. This .gov page says there are “extra responsibilities” that will affect public sector clients when the April 2020 rules come into force.
Does that mean the extra ‘bells and whistles’ which the 2020 framework has, will be transferred to the April 2017 framework? Therefore, will that mean from April, public sector clients will need to provide PSCs with Status Determination Statements (‘SDS’)?
Yes, to the extent that new regime is different from the old public sector regime, it will apply to the public sector as well. Your public sector client will have to give you a Status Determination Statement.
3. Is there any guidance on what the Status Determination Statement (SDS) should contain?
An SDS is a comprehensive statement from the client which:
(a) Declares a contractor’s deemed employment status (for tax purposes) following an IR35 assessment; and
(b) Provides reasons for reaching this conclusion.
There is no specific statutory guidance on what it should look like.
4. If we don’t wish to use CEST, how might external experts like employment law advisers help with the SDS process?
Lawyers can help with drafting SDSs for firms and their contractors. In their most useful form, these tend to be one-page summaries with details of contractor engagement and evidence of the process the end user has gone through to determine the tax status of its contractors.
Lawyers can also draft status questionnaires (as an alternative to HMRC's CEST tool), which end users can make available to their contractors and, based on the feedback provided, offer clear reasons for their determination of whether the contractor is employed or self-employed. Involving consultants in the status determination process can open conversations about a person's tax status in a non-confrontational way.
5. Towards its end, this article on ContractorUK about IR35 blanket decision-making says there are penalties for an incorrect OUTSIDE decisions, but not any penalties for an incorrect INSIDE decisions.
But the article relates to the public sector rules of 2017. Will it be the same from April 2020? In other words, is there going to be an incentive for commercial end-users to catch PSCs rather than deem PSCs not captured by IR35?
Yes, the draft IR35 legislation for April 2020 states that, in the case of a blanket determination, any payments made will be deemed to be taxable as earnings. However, this will not worry a client who wants to take a cautious approach and apply PAYE in any event. There are no further penalties for making a blanket decision to always deduct tax.
6. What if a limited company contractor disagrees with the end-user’s assessment of their IR35 status?
If an individual PSC disagrees with the IR35 status assessment (even after the end-user has provided the contractor with a summary of their reasoning), the contractor is entitled to challenge the decision. End-users have 45 days from the date of challenge to respond; failure to respond means that the end user incurs full tax liability.
If a contractor leaves it until the last minute (5th April 2020) to challenge the end user's SDS, the end-user essentially has no wriggle room. We are therefore advising end-users to set deadlines for contractors to respond to SDSs that give end-users a sufficient window to respond to the challenge.
7. What are the ramifications of the end-user not providing an SDS?
Failure by a mid-sized or large company to provide an SDS for off-payroll workers means that the company, as the end-user of the workers' services, incurs the liability for any PAYE owed on those services. It has also been suggested that HMRC will introduce penalties on those who do not provide SDSs, although this is subject to confirmation.
8. Is any engager exempt from the new IR35 framework for the private sector?
Yes, as the answer to Question 7, above, alludes to.
There is a small company exemption, based on the Companies Act 2006's definition of what counts as "small" (two out of three to be met to be considered ‘small’: annual turnover of £10.2 million or less; balance sheet total of £5.1 million or less; and/or 50 employees or fewer).
However, there is a specific anti-avoidance clause in the draft legislation. This seeks to stop businesses structuring themselves to avoid the legislation, or prevent businesses benefiting from the small company exemption when they should not.
9. Is it the responsibility of PSCs, agents or end-users to monitor the situation if the end-user is dangerously close to no longer being a ‘small company’?
Should concerned PSCs get something in writing outlining that for the duration of their gig, the end-user is ‘small’ and so exempt?
Agents would be advised to carry out ‘due diligence’ as to whether the small company exemption to April 2020’s IR35 rules continues to apply to the client. Information can be obtained from publicly available accounts on the Companies House website, and the small company exemption will continue to apply until the tax year after the end of the financial year to which the accounts apply.
PSCs are unlikely to need to carry out any ‘due diligence’ because they are unlikely to be liable for any unpaid tax unless the small company exemption does apply. However, for PSCs with sufficient bargaining power, it is always worth asking the client to give an indemnity.
10. My line manager is open to declaring me outside IR35. Looking at my contract, I’ve got ‘a Fospero’ – no substitution, but bags of me being in control and no MOO. How many pillars of IR35 do I need to get in place to stand a good chance of being decided outside IR35 by my client?
It is not a question of how many pillars of IR35 are in place but rather how they interact. In the right circumstances, such as in the case of Helen Fospero, a lack of Mutuality of Obligations between engagements can be sufficient.