Off-payroll rules: an agency contractor's recap
Since reforms to the Intermediaries legislation (IR35) for off-payroll workers in the public sector came into force a little shy of two months ago, we’ve seen a sharp rise in information requests from contractors, writes Karen Sweeting, an associate director at Harvey Nash.
These contractors -- like you we’d wager -- are keen to better understand what steps they can take to stay outside IR35, or just wish to make the most out of their contracting career inside the new framework. So what are the options for them -- and you, faced with this legislation?
The unfortunate reality is there is not much a contractor can do. The changes to IR35 mean the responsibility for deciding if the IR35 rules apply to the placement relating to the services performed by the Personal Service Company (‘PSC’) contractor, now sits with the public authority where the PSC contractor is on assignment.
Forewarned is Forearmed
The good news for contractors is that the onus has been placed on the public authority to tell the agency (us, for example), if the engagement is ‘inside’ or ‘outside’ IR35, ensuring that it takes “reasonable care” when doing so. They must provide this information to the agency prior to the start date or prior to the first payment to the contractor by the agency.
Furthermore, the agency is entitled to ask the client for reasons to support their determination and the client must provide a response within 31 days of such a written request.
In theory, for contractors, if your preference is to remain outside IR35, this means you should be able to identify the projects that facilitate that requirement at the outset, and only apply for positions advertised as outside IR35.
What if the assignment began before April 6th?
In situations where a contractor commenced an assignment prior to the introduction of the new rules, but continued to provide services after such date, contractors should have established if they fall inside or outside IR35 ahead of the rules’ introduction on April 6th.
If the contractor has not yet confirmed their IR35 status, in light of the new rules, it is imperative that it does so as soon as possible. HM Revenue & Customs has developed a digital tool to conduct a test to provide clarity and guide IR35 status decisions. In addition to this, we recommend that contractors speak to their agency/client to discuss options.
Payment models for ‘inside’ IR35
If the end-user’s status decision comes back as inside IR35, there is a range of options available to contractors. Each of which has its own merits and shortcomings.
1. Contractors can contract via an umbrella solution and the umbrella company will make the relevant deductions.
Perhaps the most obvious benefit of this option is that it saves the cost of setting up or, in most cases, winding up a PSC. Additionally, this option does not restrict you from setting up a PSC at a later date for those roles that fall outside IR35.
2. The agency would make payment via the contractor’s PSC. The agency would deduct the relevant taxes and NICs.
The biggest shortcoming of this approach is that, while you might make all the same contributions of an employee, no employee rights will apply and you still have the costs associated with having a PSC.
3. The agency/ client could (if available) engage the contractor on a PAYE basis. They would deduct the relevant taxes and NICs.
While this ensures your compliance on the tax front, you are for all intents and purposes an employee and such employment many include all benefits that an umbrella has to offer.
Demonstrate you are a PSC
Before continuing any further, it must be made clear, once again, that the ultimate decision of your IR35 status (inside or outside) sits with the public authority. Even in situations where a contract places you outside IR35, HMRC is able to look at the working practices and may conclude that you fall within IR35. Our recommendation is that you take the necessary time and available advice to ensure that you are able to demonstrate that you genuinely fall outside IR35. We believe that the only fool-proof way of covering yourself is to clearly and regularly communicate with your client/ agency to ensure you are operating outside IR35, and conduct reviews on an ongoing basis (preferably with a specialist independent adviser) to ensure the same.
There is no doubt that the new IR35 rules have been met with a lot of confusion and hostility. The reality though, almost two months down the line, is that they are here to stay. Understanding your options and responsibilities with the help of your agency, client and potentially advisers too is critical if you are to avoid falling foul of HMRC.