Off-Payroll Rules’ liability: your top tax and status FAQs about April 2021
A consultancy in the chain? Gaps into your contractor assignment? Even a ‘fighting fund’ to pay HMRC tax bills under April 2021’s off-payroll rules – and not just a fund for PSCs as ContractorUK readers have asked about when facing IR35, but a fund for engagers!?
These are all outstanding issues as far as contractors are concerned, or at least so the ContractorUK Forum implies, in the ongoing grapple with private sector off-payroll rule liability; who it rests on, when and how to prep for it, writes Matt Sharp, partner at Fieldfisher.
But first and as we promised in Part One of this IR35 liability guide, let’s first address a more overlooked area which is best explored by the question:
What other liabilities can arise from IR35?
So slightly lost in the pressure-cooker that is preparing for April 6th 2021 is the fact that IR35 assessment may raise other liabilities separate to tax.
The most common liabilities tend to relate to employment law. If a worker is deemed to be an employee for tax purposes, but not for employment law purposes, the individual may choose to assert employee status and claim the rights that go with employment.
The worker can pursue these rights at an employment tribunal, which is a free forum to litigate.
Example C/ What additional rights might be sought by the no-longer-self-employed?
Similar to Part One’s Example A and Example B, let’s now envisage a standard three-party chain involving an IT consultant who is paid through a PSC for providing services to a banking client. This is Example C.
If that IT consultant has worked regular hours for that client over a number of years, from the client's premises, using the client's equipment, alongside the client's employees, receiving expenses and staff benefits from the client, appearing on the client's external documents and attending the client's staff functions, they may quite plausibly be assessed as an employee for IR35.
Under the April 2021 framework, the consultant may challenge the bank’s tax status determination. Or the consultant may decide to accept it and pursue additional rights as an employee. These could include
- Employer pension contributions
- Share options
- Bonus payments
- Holiday pay,
- Medical insurance
- Other benefits extended to the banking client’s regular employees.
N.B. In chains with more than three entities, the same situation would apply, assuming that the worker's PSC/intermediary is paid directly by the end-client, rather than through an agency or another entity in the chain.
How to prepare for private sector IR35 reform? Paperwork, processes and policies
There is no definitive way to avoid IR35. However there are certain steps businesses can take to prepare for the new rules.
- As a starting point, companies that use off-payroll workers should review all their existing employment documentation with IR35 in mind.
- Particular attention should be paid to drafting documents such as:
-Employment contracts; and
Each of the above three should be clear and distinct from the other two categories.
- Contractor services need to be defined clearly, without getting into operational issues; and
- All terminology needs to be B2B, not B2C, to reflect that the agreement is with the PSC, rather than the worker.
If documents are out-of-date and no longer reflect the service being performed by the contractor, this is a good reason to amend the paperwork.
However, if the paperwork is correct, under no circumstances should it be altered to give a false impression of the client's relationship with the worker.
Tribunals will immediately see through this, and it could land both the client and the worker in hot water with HMRC.
What other IR35 reform /off-payroll rule considerations are there for engagers?
- It may be necessary to draw up new internal policies and procedures for dealing with contractors (including ‘How to determine status using Status Determination Statements’ and ‘How to begin dispute resolution using our internal Status Disagreement Process’ in the likely event of a disagreement on status).
- These policies should then be communicated widely to staff, to ensure that everyone in the business understands what needs to be done and when, for assessing and communicating contractor IR35 status.
- It is also advisable for companies to think carefully about the consequences of IR35 for their businesses and to embed these into commercial agreements with other parties in contract chains.
- It is possible to indemnify a business for Employee NICs and PAYE, but this is barred for Employer's NICs.
What about gaps in assignments? And do breaks at an engager affect IR35?
Length of engagement is one of the factors engagers will likely consider when looking at status (i.e. if the individual worked directly for the end-client, would they be more likely considered an employee or self-employed due to the length of time served).
However, length of engagement is unlikely to be determinative alone – it is one of many factors considered, and, on its own, duration is not an IR35 criterion.
As to gaps in an engagement – which are often regarded as a way to make long engagements look less inside IR35, context is everything.
Example D/ When do gaps in contractor engagement have IR35 implications?
Mr Blogs works for Joe PLC through Blogs Limited. Mr Blogs worked with Joe PLC for 10 years, had an eight-month break and then continued to work for Joe PLC for another five years.
The gap is unlikely to matter and the length of engagement is likely to be more indicative of an employment relationship.
If, however, Mr Blogs did a two-month engagement, followed by an eight-month break, then a one-month engagement, that eight-month break is likely to be more relevant and may be a factor indicating self-employment.
What about IR35 liability if there’s a consultancy in the chain?
The distinction between a 'contracted out service' and a 'labour supply' is an important one that contractors ought to get their heads around.
By way of example, this is a ‘contracted out’ service:
Mr Smith provides services to CDE Limited through a personal service company, Smith Limited.
CDE Limited has been engaged by ABC PLC to build and deliver a payroll system.
The number of workers needed to deliver the project is decided by CDE Limited. CDE Limited is paid a fixed fee for the project; it bears the risk that more contractors are needed to complete the job on time.
ABC PLC are not sent workers, the work is done at CDE Limited. Mr Smith is one of the consultants working on the project.
In this scenario, CDE Limited would likely be considered to be providing a 'contracted out service'.
Mr Smith -> Smith Limited -> CDE Limited -> //// -> ABC PLC
By way of example, this is ‘labour supply’:
ABC PLC is building a new mobile payments system.
It asks CDE Limited to supply five contractors to help build the new system.
CDE Limited supplies Mr Smith/Smith Limited.
In this scenario, CDE Limited would likely be considered to be providing a labour supply.
Mr Smith -> Smith Limited -> CDE Limited -> ABC PLC
Contracted Out & Labour Supply, who decides status and who deducts tax?
This distinction is important when it comes to considering who is responsible for: (1) making the status determination; and (2) who is responsible for making tax deductions if IR35 applies.
As regards the status determination, this is always the responsibility of the end-client:
In the ‘contracted out service,’ CDE Limited is the end-client. It will be responsible for making status determinations.
In the 'labour supply' situation, ABC PLC is the end-client. It will be responsible for making status determinations.
Assuming all parties have complied with their obligations under the reformed IR35 legislation from April 2021, then the default position for who is liable to make tax deductions is the entity nearest the 'intermediary' (in this example the intermediary is Smith Limited, the PSC).
In both examples, the entity nearest Smith Limited is CDE Limited so it will be responsible for making tax deductions.
This position is complicated (and changed) if any party has failed to comply with the IR35 legislation (for example not passing the status determination down the labour supply chain) or if there are foreign entities in the labour supply chain.
Out of obligation, is there opportunity?
While IR35 represents a compliance obligation for private sector businesses, it should be recognised that there is a positive aspect to this change in the law.
It represents an opportunity for businesses who use off-payroll workers and potentially complicated contractor relationships to streamline their resourcing and become more efficient.
For any business considering corporate level transactions, such as a sale or merger, IR35 compliance will be one of the key areas of focus for due diligence, alongside data protection and pensions obligations. Putting solid procedures in place now may therefore be critical to the future of your company.
What final preparations should contractors and engagers make?
There is some talk of engagers building a ‘warchest’ or ‘fighting fund’ in the event that taxes are found to be owed to HMRC. What’s clear is that businesses should absolutely be preparing now.
End-clients need to be:
- learning about the April 2021 IR35 legislation and what it means, in practice
- making individual status determinations for relevant off-payroll workers; and
- implementing any necessary changes (See 'Paperwork, processes & policies,' above)
We also recommend that end-clients draw up IR35 policies and procedures (especially to deal with IR35 Status disputes) and get relevant precedent documents prepared (such as Status Determination Statements).
Everyone, consultants/contractors, end-clients and other intermediaries, should be reviewing contracts and agreements (e.g. agency agreements, consultancy agreements, outsourcing agreements). Get these checked for IR35 compliance.
As to whether businesses should put money aside in anticipation of an IR35 enquiry by HMRC, it’s a matter for the individual businesses. If companies have concerns, an alternative to creating a 'fighting fund' may be to look at IR35 insurance options.