Off Payroll Legislation IR35 Reform FAQ
Please note: this blog was written before the IR35 implementation date was delayed to April 2021, however the information contained in this blog is still relevant and helpful.
Following the most recent round of SThree IR35 webinars, we answered a number of questions at the end of the sessions and thought it best to put together a short FAQ guide to cover the main questions to complement our current pool of available resources. You can view the resource page here and also watch recordings of the client and contractor webinars.
When will the new rules in the Private Sector take effect from?
The reform is planned to start from 6th April 2020, previously it was going to apply to payments made from that date however it recently changed to be for services provided from that date.
Do all clients in the Private Sector have to apply the new rules?
The reforms will not be applicable to any small companies as defined by the Companies Act 2006. Small companies are defined as those which satisfy two or more of the following requirements:
- Turnover no more than £10.2m
- Balance sheet total no more than £5.1m
- No more than 50 employees
Any workers carrying out assignments for small companies will continue to apply the current rules.
What am I going to need to do differently as a client or hiring manager?
It won’t be the contractor deciding their own IR35 status any longer. As a hiring manager, or someone who engages a contractor using a Limited Company to supply services, you will need to make a determination on whether the rules apply to the specific assignment. Once you have done that you will need to send a copy of the determination along with the reasons why you reached the decision to the next party in the supply chain. This will usually be the agency, unless the contractor is working directly for the client. This determination is known as a Status Determination Statement.
How do I make a determination on the IR35 status of an assignment?
Several elements need to be considered, the three key elements being Control, Personal Service (Substitution) and Mutuality of Obligation. Most clients are using the government CEST Tool to make a determination which can be found here.
There are lots of other organisations who can provide help with independent IR35 determinations as well.
The key thing to remember as a client is that you need to legally take ‘Reasonable Care’ in making the determinations otherwise there is a risk that liability can be passed back to you as the client.
What is ‘Reasonable Care’?
Reasonable care was added to the legislation before the reform to the Public Sector rules in 2017. It was to prevent clients making blanket determinations and to mitigate the risk of incorrect determinations being provided.
Reasonable care hasn’t been properly defined however it is sensible that clients do the following:
- Ensure all of your hiring managers are trained on the new rules and how to apply them
- Have a well-documented determination process
- Make a determination on each individual assignment/contractor rather than blanket determinations
- Setup an IR35 working group internally who can assist with making determinations
- Ensure that the relevant contractor is consulted when making determinations so that you can see the full picture.
What is a blanket determination?
A blanket determination is where a client determines that all contractors are either Inside or Outside IR35. This can be company wide, department wide, or across a series of contractors working on similar roles. All of these should be avoided otherwise it could be determined that reasonable care has not been taken, transferring the liability back to the client.
What if a contractor disagrees with the Status Determination Statement that they receive?
If the contractor/worker disagrees with the determination they are able to appeal through a new client-led disagreement process and the end client will have 45 days to reply. If the end client stands by their initial determination then they will have to provide the reasoning behind it. If they agree it was incorrect, they can provide a new Status Determination Statement.
Can you explain what you mean by ‘Control’ when making a determination?
Control is one of the key areas for consideration when determining the IR35 status of an assignment. This specifically looks at the how, when and where the services are carried out and who controls those elements. If the contractor controls how the services are provided this can help towards signifying more of an Outside IR35 position. If the client controls the provision of services this looks more like the rules would apply and could be considered as a factor towards an Inside IR35 determination.
I’ve heard that substitution plays a big part in a determination, is that correct?
Personal service/substitution is one of the factors taken into account when a worker’s assignment is determined. It is not the most nor is it the least important factor but needs to be considered alongside the other factors. Personal service is a strong indicator of employment status. In a ‘normal’ employment relationship, the employee would not be able to send in a substitute to carry out their services.
Where a contractor is operating Outside IR35 there should be a ‘Right of Substitution’ clause in the contract, however, it’s not enough just to have this clause in the contract and it must be reflected in the working practices of the arrangement; meaning that if a substitute was provided at any point, that substitute would be accepted by the client.
Can you explain 'Mutuality of Obligation' and how that helps with making a determination?
This element looks at whether the client are obliged to offer additional work beyond what was originally agreed and if the contractor is obliged to accept any such work offered. If both parties are obliged to do this then it can point more towards an Inside determination. If neither party is obliged to offer or accept additional work outside of the agreed contract, this helps with an Outside determination. Of course, if there is an additional requirement or project, a new contract can be put in place specifically for that work with some agreed scope and deliverables.
What else changes as a contractor if my client determines the assignment to be Inside IR35 and for the rules to apply?
If the client determines the assignment as Inside IR35 and you want to continue to use your Limited Company, then the Fee Payer (whoever is closest to the Limited Company in the chain) will have to deduct the relevant tax and national insurance contributions before paying the Limited Company the net amount.
Who is usually the Fee Payer?
In most cases in the UK, the fee payer is an agency who is paying the Limited Company that the contractor is using. In some cases, where a contractor is supplying services directly to a client, the client will be the fee payer and will have to make the relevant deductions and deemed payment to the contractor. Not all end clients will have the payroll setup to do this which is why clients are moving away from the direct contractor engagement route and using an agency to run these contracts. As long as the client has taken reasonable care in making the determination and passed that to the agency or fee payer below them in the chain, then the liability for the correct payment sits with the fee payer.
What if there are multiple parties in the supply chain?
As we have mentioned, the end client have to make the determination, they are also obliged to then pass that determination to the next party in the supply chain. At that point, that company need to pass the determination on to the next party until it reaches the party who are closest to the Limited Company, this agency then become the fee payer. Any agency or supplier in the chain who does not pass the determination down the chain essentially becomes the ‘Fee Payer’ and takes the associated liability so it’s important that everyone in a longer supply chain passes the information down to the next party in a timely manner.
As a contractor, how much will my retention or take home pay change if determined Inside IR35?
It very much depends on a number of factors, if you move to an Umbrella Company or if you want to be paid through a Limited Company model. We are unable to provide advice on individual changes to pay, however we have an Approved Supplier List of Accountancy and Umbrella Company partners who can provide this information. You can contact them here.
I’m a contractor currently using a Limited Company to provide services and believe most of the assignments I take the client are going to determine that the rules do apply (Inside IR35) which options are available?
In this situation, there are a number of options available, if the majority or all of the assignments are likely to be determined as Inside IR35 switching to an Umbrella Company could be considered as the best choice. You will be employed by the Umbrella Company and take advantage of the employment benefits that they offer. The Off Payroll Legislation will no longer apply as you are not using a Limited Company. The Umbrella Company will ensure all of the necessary Tax and National Insurance contributions are correctly made as well. One thing to ensure in this situation is that you should only work with a compliant Umbrella Company, our list of approved suppliers can be found here. These are all also FCSA Accredited which is respected as the gold standard of Umbrella Accreditation.
If I’m contracting using a Limited Company and its likely that most of my assignments will be determined as Outside IR35 and for the rules not to apply, will anything change or will I need to do anything differently?
Nothing will change in the way that the fee payer makes payments to your Limited Company number. They will still pay you the contractually agreed rate with no deductions. The only thing to do is to ensure that your working practices mirror that of an assignment being completed in an Outside IR35 fashion. If there is a material change in the services or the way in which they are provided then a new determination should be made by the client and appropriate action taken.
What actions can I take as a contractor to ensure that I’m providing services in an Outside IR35 way?
Limited Company contractors will need to be thinking and acting like a business. Think about control, ensure that it’s you that is controlling the how, when and where the services are carried out and not the client you are delivering these services to. The client should be educated to understand why this is the case, and not try and engage with your business in any other way.
Ensure that there is a substitution clause in your contract and in the contract between the agency and the client, make sure that the client is aware of this and that they understand that they are in a business to business relationship. As part of that your business has the ability to decide if it wants to change the consultant that it is providing the services and if it does so, the client should accept this.
Think about the 'Mutuality of Obligation' element, make sure that the work you are providing is very clearly defined in a schedule / scope of services or statement of work within the contract. Make sure that this is agreed up front and you don’t stray from delivering those services exactly in line with the contract that your business has been engaged to provide. Ensure that there is another project to complete, it’s scoped out and clearly defined in a new contract for services before the work commences.
We will be following up with more detail on working in an Outside IR35 way shortly so please keep an eye out.
If a client says I need to use their equipment will this put me Inside?
An IR35 determination is made using a number of factors. The three main ones being 'Control', 'Personal Service' and 'Mutuality of Obligation'. Equipment is a factor but not considered from a case law perspective as one of the main elements. It is highly unlikely that using a client’s equipment on its own would not make the rules apply and the determination to be Inside IR35. It's widely accepted now that a contractor is likely to have to use the clients own laptop or other IT equipment, this is usually for security reasons and as a result will have little bearing on a determination.
If I work abroad will the reforms apply to me?
If you are using a UK Limited Company and you are tax resident in the UK then the rules would apply. If, however, you are working outside of the UK, not using a Limited Company then the tax rules specific to the country in which you are operating would apply.
If I am deemed Inside can I still claim expenses?
As long as there is a provision within your contract with your agency or end client then you can claim expenses. The IR35 determination will not change this.
Do you have any partners that provide an independent service to determine IR35 status?
Yes, we do. Please speak to your consultant who will be able to advise. If you don't have a consultant then please get in touch using the form below.
If I work via a Statement of Work will my assignment still need a determination?
A clearly defined contract which details the proposed title of the services to be provided, estimated completion dates and also deliverables can help with the mutuality of obligation elements. This on its own will not change the status. If the party supplying services holds a 'Contract for Services' with the end client, the liability for making the determination moves from the end client to the party supplying the services.
Is there a contract duration aspect to the inside IR35 status?
Contract duration isn't a key factor in determining IR35 status however, if services have been provided for a significant amount of time, these may have fallen into a BAU type situation and the elements around Control, Personal Service and Mutuality of Obligation may have shifted in that time period. It's important to have regular reviews to check this hasn't happened.
If my assignment is Inside what will the deductions be?
It depends on how you propose to supply services. If you move into an employed structure using an Agency PAYE or Umbrella Company model, IR35 will not apply and you will pay statutory employment taxes. If you propose to continue to use your Limited Company for an assignment despite the Inside IR35 status then the fee payer will make a deemed payment.
If my assignment is Inside will my pay rate change?
If the assignment is determined as Inside IR35 and for the rules to apply, if you are proposing to continue to use a Limited Company then the rate in the contract will not change but the amount the company receives will change as the Fee Payer will have to make a deemed payment in line with the legislation. Where you have been receiving a gross amount to the Limited Company, this will change to a Net amount following the rule change. If you decide to change models and move to an Agency PAYE or Umbrella Company, you would need to put in place a new contract and will agree a new rate.
If I worked on two separate assignments at the same time would this ensure that I am Outside?
It is important to remember that when a client is making a determination, they are doing so on the assignment in question and not on the Limited Company. The assignment will be assessed individually. Naturally, from a case law perspective, if ever challenged by HRMC having multiple end customers could be looked at as an indicator of supplying as a business.
How does substitution work?
The concept of Personal Service or Substitution is a strong indicator of IR35 status based on case law. For a genuine right of substitution, not only should there be contractual provisions allowing substitution to happen in the contract but the client should be willing to accept a substitute if offered. The substitute needs to be paid by the Limited Company and not by the client or agency.
If my assignment is Inside but I continue working through my Limited company will I still need to pay VAT?
Yes. The VAT element is removed from the calculation of the deemed payment though but will still be paid to the Limited Company by the Fee Payer.
We will be following up with more detail on working in an Outside IR35 way shortly so please follow our LinkedIn company page for the latest updates. You can also view all our available IR35 resources here.
Real Staffing is part of the SThree group of companies. This document/article is for information purposes only, and should not be seen as providing legal or tax advice. SThree and its family of brands, advises clients and contractors to seek independent legal and/or tax advice, where required.