Unsurprisingly, there have been a number of blogs written about IR35 recently, many of which have been opinion pieces. With less than 10 days to go until the new IR35 legislation comes in to play, for this piece I wanted to focus purely on the facts, as we understand them.
The caveat: As with any new legislation there will always be a level of ambiguity until there have been test cases so please bear in mind that the information below is based on our understanding of the legislation as it stands today.
What is IR35?
IR35 is a piece of tax legislation that came into force in April 2000 and was designed to combat ‘disguised workers’ – tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company, but who would be deemed an employee if the intermediary was not used. Those considered within IR35 should be paying tax at the same rate as those employed permanently.
What’s changing on the 6th of April?
In the past, the responsibility for determining IR35 status, whether providing services in the private or public sector, lay with the PSC (Professional Services Company), usually their own Limited Company in the case of many Contractors.
From April the 6th this will no longer be the case for the Public Sector and the responsibility for determining the status of the worker, whether or not they are considered to be within or out-with the IR35 legislation, now rests with the Public Sector body who releases the role.
In addition to this, from the 6th of April responsibility for paying any outstanding or unpaid tax owed by workers considered inside IR35 will rest with the fee-payer. For Contractors through an Agency or offshore intermediary this means that the Agency is responsible for ensuring that PAYE tax is paid and will also be held liable for any outstanding tax owed. This also applies to any unpaid invoices as of the 6th of April.
What does this mean to Public Sector Hiring Managers?
As mentioned, Public Sector bodies are now responsible for assessing whether or not Contract or Temporary workers fall under the scope of IR35 or are to be considered out-with the legislation. HMRC has provided an assessment tool to help them do this which can be found here: https://www.tax.service.gov.uk/check-employment-status-for-tax/setup.
For Contractors currently in place, the Public Sector body / hiring manager should use the tool, answering the questions as honestly as possible, utilising the outcome as a guide as to whether IR35 applies to the worker. They then need to inform the worker and any agency or intermediary involved of the outcome.
For any new roles, the Public Sector hiring manager should use the tool to assess whether or not the role they are releasing will fall inside IR35 or not using the same tool and answering the questions based on their expectations of the worker they will be looking to recruit rather than a specific individual. They should then release the role via their chosen route to market, clearly stating whether the role is classed within or out-with IR35. Hirers are required to communicate their IR35 determination to the agency closest to them in the supply chain either before the contract is agreed, or when the services start (whichever is the latest).
What does this mean to Contractors?
If you are currently contracted to a Public Sector body or subsidiary, by now you should hopefully have been made aware as to whether you are going to be considered within or out-with IR35. If this has not yet happened, press your hiring manager for a decision as soon as possible and make sure that your agency, should you be through one, is also following up on this.
We would advise you also to use the HMRC tool, answering the questions as honestly as possible. Should you disagree with the conclusion your hiring manager or public sector client has come to, it may be worth discussing this with them and going through the tool together. Regardless, you should abide by the decision given by the Public Sector body should they consider you inside IR35 as we foresee there being very little come back, if any, should you be audited by HMRC.
If you are considered to be outside the legislation then nothing changes and you can continue billing via your PSC (Professional Service Company). If however you are judged to be inside IR35, you will have to pay PAYE tax rates on all work invoiced on or after April the 6thshould you decide to continue in your role. For convenience, you may want to sign up with an Umbrella company who provides PAYE services and many of them can be found online.
If you aren’t currently contracting within the Public Sector but are considering applying to Contract vacancies, make sure you are aware or the IR35 classification of the role and implications before applying.
What does this mean to Agencies?
Obviously a question we’ve been keen to answer for ourselves. Whilst the Public Sector body is responsible for making the IR35 assessment, the liability for ensuring the correct tax is paid rests with the agencies. As such, you will not only want to be certain of the accuracy of the assessment & result but you will also want to ensure that any Contractor judged to be within IR35 is paying the appropriate amount of tax. Again, from what we’ve seen the most effective way of doing this is asking the Contractor to engage via an Umbrella on a PAYE basis.
The points above outline our current understanding of the legislation. Given the ambiguity and uncertainty that’s surrounded the implementation and the delay in getting access to the online assessment tool, not to mention the fact that it’s still in its Beta phase, we’d advise everyone to revisit both the tool and the HMRC site for updated advice and changes over the coming weeks.
If you’re interested in my opinion on the new legislation and have any questions, please contact me directly.