IR35 & New Off-Payroll Rules
IR35 has been in force for many years, however in 2017 HMRC changed this legislation in the public sector for off-payroll working to close loopholes that allow people working through personal service companies to avoid tax contributions, raising an estimated additional £550m. Extension into the private sector, currently estimated as costing the exchequer £1.3bn, is timetabled to come into force in April 2021. Any assignments within a medium or large private sector organisation (the definition of which is likely to be based on Companies Act 2006 definitions) will be affected.
Impact To Clients
You are responsible for deciding if the off-payroll rules apply to an assignment and must take “reasonable care” when doing so, otherwise the fee-payer liability and burden shifts to you.
You must inform the party with whom you have a contract whether the assignment falls within the rules by latest start date of assignment or for current placements live on April2021bypayment date. There will be a time limit of 31 days from request for clarification of decision.
Being involved in an HMRC investigation has huge time and cost impacts to all parties involved – contractor, fee payer (agency or MSP) and end client stakeholders – you want to avoid this at all costs by being compliant!
Initial reports indicate the majority of roles within Clinical Research will fall in-scope of the new legislation and therefore contractors will need to be processed through a payroll so tax/NI can be deducted at source. Most clients are looking at a business-wide approach to ensure compliance and avoid risk and liability.
You need to pre-plan for potential changes in contractor population and to minimise impact (timelines and costs) to the business; Contractors may demand an increase in rate to compensate for the NI/tax liabilities they will incur after April 2021 if moving in-scope of IR35 and will likely pass this up the chain, other contract workers who won’t accept a reduction in net pay may move on (some contractors may be drawn to working overseas or smaller businesses, etc.); Contractors may want to go permanent with the end client which will also have a planning/cost impact.
Things To Consider
You need to decide who will be responsible for making the status decision in your business. We recommend that “super users” are trained to understand the process and the law.
HMRC have developed an Employment Status Tool for Tax“CEST”to understand HMRC’s view, although it is voluntary to use, and asks questions around the below. There are also third-party assessors who can advise on the off-payroll decision:
Supervision, direction and control- Does the contractor have a line manager who gives direction to or controls how they do the work? The existence of control and/or direction would indicate a role being inside IR35.
Mutuality of obligation (MOO)- Does the client have to give the contractor work beyond the current project, and does the contractor have to accept? A true contractor should not have MOO within their contract.
Personal service / substitution- Can the contractor substitute their work or project to somebody else and do they have the correct authorisation for the substitution to pick up the work and if needed also be on-site? Being required to offer personal services indicates being inside IR35.
There are also other things to consider such as level of risk, whether the contractor is included in company events, the supply of equipment, how integrated they are to a team, etc.
Speak to your recruiter about how to work together for current and future contractors - Off-payroll status can change mid assignment so continue to have a communication plan. The fee-paying agency needs to remit the Employers’ NICs and if applicable apprenticeship levy, therefore extra cost of supply must be factored into rates for the assignment.
The criticality of the contractor, skills or role is likely to influence your decision-making. In the public sector, we have seen an increase in rates for sought after skills, reduced supply of contractors, some clients converting contract roles to permanent roles and a keen interest in statement-of-work models. We expect to see all of this when it rolls out into the private sector and you should therefore plan for this.
If you are deemed to be a small company and outside of legislation changes, you must review regularly as your status could change at any time and the new legislation then be applicable to you.