Setting the IR35 record straight: the wrongs, rights and maybes of April 2021’s off-payroll rules
Most limited company contractors now know that the responsibility for assessing their IR35 status will pass from them, to the end-user who engages them in a little over six months’ time -- from April 6th 2021.
But there are quite specific aspects of the incoming off-payroll legislation about which understanding is not as widespread. Here, exclusively for ContractorUK, Matt Fryer of Brookson Group tackles ten of the more nuanced IR35 myths, maybes and realities.
1. ‘It’s only IR35 in the private sector which is changing; the public sector IR35 rules are not changing – they’ve been in force since April 2017 and will stay in force unchanged.’
Wrong. While the new private sector rules are largely based on the current public sector rules, there are some new requirements to bring both regimes onto the same legislation from April 20201.
The public sector will therefore need to ensure it engages in the changes and revises its practises to continue to comply.
The most significant new requirement for the public sector will be the need to produce a Status Determination Statement (SDS), and pass it down the supply chain to the contractor prior to the contract commencing, or prior to April 6th 2021 if the contract has already started.
Contractors in the public sector working through a PSC should expect to receive the SDS and it might be good practise to request this if it is not forthcoming. While many public bodies currently practice ‘reasonable care,’ this will now also be a statutory requirement along with the requirement to put in place a client-led challenge process, under which contractors can object to the decision (by the client) about their IR35 status.
2. ‘There is no incentive in the legislation for a client to deem ‘inside IR35’ just as there is no incentive in the legislation to deem ‘outside IR35.’’
Maybe. If a client fails to take ‘reasonable care’ and deems all PSCs to be inside IR35, the client becomes the ‘fee-payer.’ Then, the client is the party responsible for deducting employment taxes and paying them over to HMRC. This is unlikely to happen where the PSC is supplied via an agency as the agency will make payment to the PSC and deduct the employment taxes. If HMRC applied the rules correctly they should refund the employment taxes to the agency and raise an assessment to the client together with late payment interest and a penalty.
In fact, recently published HMRC guidance spells this out very clearly “If the client has not taken reasonable care then responsibility for the deduction of tax, NICs and apprenticeship levy and paying these to HMRC is the client’s. This is the case even if another party has already made deductions in line with the original determination”.
This is why, I suspect, many savvy clients intending to place all PSCs inside IR35 will take the decision to move all PSCs to an ‘on-payroll’ model to avoid the rules entirely. The only incentives for them not to do this is are commercial, reputational and their ability to attract and retain skilled resource.
3. ‘In the public sector, some organisations are exempt from the 2017 rules on IR35. Those exemptions will be removed.’
Correct. From April 6th 2021,the off-payroll rules will apply to all public authorities (regardless of size), and all (UK-based) medium and large non-public sector organisations.
There was a specific exclusion from the April 2017 public sector rules for entities providing pharmaceutical and ophthalmic services, but those exclusions will no longer apply after April 6th 2021.
There are therefore no sector specific exemptions referenced in either the legislation (which has has now received Royal Assent), or HMRC’s existing draft guidance. Specific concessions may be made for roles that are subject to Security Clearance or if the issue of an SDS may breach national security. These possible exemptions would need to be agreed via specific concessions with individual clients and are unlikely to be made public.
4. ‘An SDS is mandatory and should be being used by all organisations in the run-up to the April 6th 2021 commencement date.’
Correct. While an SDS is not mandatory under the current public sector rules, it will be mandatory under the new rules effective from April 6th 2021.
An SDS will therefore need to be issued by public sector bodies and medium and large private sector organisations for all contracts involving a PSC.
For incumbent contracts, the SDS needs to be issued on or before April 6th and for any contracts commencing after April 6th 2021, the SDS will need to be issued prior to the contract commencing.
While technically an SDS has no legal status until April 6th 2021 (when the new rules become law), HMRC has clarified that an SDS issued prior to April 6th can be valid, providing they meet the legislative requirements.
I would therefore expect most clients to issue one for incumbent roles at some point prior to April 6th 2021 to allow for any contractor challenges to run their course and any changes to the contracts or working practises to be agreed prior to April 6th 2021.
It should be noted that if the client is ‘small,’ it is exempt from the 2021 rules and not required to provide an SDS as the contractor continues to be responsible for managing their own IR35 position. In these circumstances, the legislation provides for the contractor to ask if the client believes it qualifies for the ‘small company’ exemption, and the client has 45 days to respond. If they don’t respond within this timescale then the request is enforceable via an injunction.
5. Contractors have got no option but to use the umbrella company on their agency’s PSL.’
Wrong (although increasingly likely). The legislation doesn’t stipulate how a contractor should be engaged, it merely determines the tax and NIC due if their services are provided by a PSC.
The options of PSC, agency payroll and umbrella company still remain. Due to the debt transfer provisions contained in the new rules, other associated legislation such as the Managed Service Company rules, the Criminal Finance Act and the 2019 Loan Charge fiasco, many agencies are now maintaining strict control over any third parties who engage and pay their candidates. This is to protect them, their clients and their candidates from risk. I can therefore envisage it becoming harder for a contractor to force their agency to engage with an umbrella company who does not sit on the agency’s pre-approved list of providers.
6. ‘Clients requiring contractors to go down the more taxing route of umbrella working must increase contractor rates to compensate for the extra tax/take-home pay dent.’
Wrong. The pay rate offered to a contractor is not governed by any legislative requirements and is a commercial arrangement between contractor and client, often with the agency acting as the broker. As a result, there will be no automatic adjustment to pay rates unless the contractor / agency requests this or the client chooses to offer / agree to this.
7. 'Clients are encouraged by HMRC to require contractors to work on -payroll (or via an umbrella), even without an SDS/ assessment of IR35 status being run.’
Maybe. Despite this rumour, we have not seen any evidence first-hand of HMRC encouraging clients to require contractors to work on the client payroll or via an umbrella company. It could be argued, however ,that the new rules encourage this behaviour as by engaging a contractor in a method other than a PSC, the new rules are side-stepped in their entirety.
8. A private sector client can test one PSC for IR35; determine inside, and then all that client’s divisions, subsidiaries and jointly-owned businesses, can follow the outcome of that single contractor’s determination and deem all other PSCs ‘caught’ without running any further status reviews.'
Wrong. This is an example of a blanket determination.
A status determination is required for all contracts involving a PSC, and it would be highly unlikely that (as in the example above) all contractors working in multiple divisions and subsidiaries will be working under the same contractual terms (the contract being what is written down and what is played out in practice).
That said, HMRC will allow (if ‘reasonable care’ has been taken) one assessment to apply to a group of contracts where, and only if, they are all engaged under the same contractual terms and conditions and the working practises are also the same.
9. ‘G-cloud status’ means the agency I work via doesn’t need to abide by the IR35 rules from April 6th 2021, so I’m exempt too.’
Maybe. G-Cloud is a government procurement framework for procurement of specialist services. There are specific lots within this framework that only allow buyers to procure contractors who operate outside of IR35 i.e. the procurement hub only allows procurement of services, not ‘disguised employees.’
However, it is still the responsibility of the buyer (public sector body, not the agency) to check whether the IR35 rules apply or not. Yet I would envisage most services procured under the G-Cloud framework directly to the client to be outside of the IR35 rules entirely, as most of the services procured are scoped around specific deliverables and lend themselves more towards a Statement of Work (SoW) provision, than a supply of labour.
Care must be taken if the contractor is supplied to the client via an agency – agencies tend to construct their contracts based on delivery of time and materials, rather than genuine statements of work so this scenario would require a detailed review.
10. ‘A Statement of Work offering from the agency/client gets around IR35 so I needn’t worry about the April 6th 2021 rules – now I’ve got a SoW in place.’
Wrong. The off-payroll rules apply to situations where an individual personally performs services to a client via a PSC.
If the services being provided involve a fully ‘contracted out’ service where it is irrelevant who the individual is or indeed how many individuals perform the service, then it is likely that IR35 will not apply.
There has been a growth in the use of so called ‘SoWs’ as they are seen by some as a ‘silver bullet’ to avoid the IR35 rules. But this is by no means a silver bullet in reality, and should be treated with caution as the client will remain liable for making IR35 assessments if the arrangement is found not to be one that is a fully contracted out service.
It is an area HMRC have tried to clarify via guidance and view as a potential area for non-compliance, so I expect they will be reviewing these types of arrangements early on in their enforcement programme.
That said, a contract defined by deliverables / outcome based where the client has no involvement in selection of or management and control of the individual(s) providing the service, is likely to fall outside of the rules. Care must be taken if a contract which was historically provided via an agency based on a ‘time and materials delivery’ of a specific contractor being reengineered to appear to be a SoW.
Editor’s Note: The author, Matt Fryer is head of legal services at Brookson Group, a long-standing service provider to the contractor industry which is working with contractors, agencies and end-hirers to help them prepare for and manage the new IR35 rules.