With the IR35 changes now less than 2 months away, the off-payroll working rules have been on everyone's mind. In this article we will provide a brief background to the changes and take a look at some of the key steps and processes that you should take in order to be fully prepared come the 6th April 2021. We will also take a look at the risks of relying on tools to create a status determination.
Background to IR35 Changes
At present, if you supply a worker to an end-client in the private sector, the worker's intermediary or personal service company ('PSC') must decide if the off-payroll working rules apply and pay the tax and NICs due.
This will all change however, come the 6th April 2021, and the changes will affect both the private and public sectors.
From the 6th April 2021, medium and large sized private sector end-clients who receive services from a contractor using a PSC will be responsible for:
- Determining whether the contractor is inside or outside IR35 and creating a status determination statement ('SDS'), and
- Passing the SDS onto the contractor and any agency in the contractual chain that they contract with.
There is no small business exemption for the public sector, and all public sector end-clients remain responsible for deciding if the rules apply. However, they will now have to provide an SDS which must be passed onto both the contract and any agency they contract with and create a dispute resolution process.
The status determination should be made before the contractor starts provides services on or after 6th April 2021.
The changes mean that agencies could become liable for paying tax and NICs if they:
- Are the fee-payer, or
- Are not the fee-payer but do not pass the SDS onto the next agency in the contractual supply chain, or
- Are the first agency in the contractual supply chain and HMRC invokes the transfer of liability provisions.
Key Steps to be Prepared for the Changes
So, given the risks to agencies which are posed by the changes, what are some of the steps that agencies should be taking to prepare for the 6th April 2021?
- Look at your workforce. This includes:
- Identifying how individuals are supplying their services, e.g., is it through a PSC or limited company, an umbrella, self-employment, sole traders etc.
- Identify whether any contractors are non-UK residents or live abroad and consider whether the IR35 rules will apply, as there are specific rules relating to overseas and international contractors.
- Put in place a process to identify and onboard future contractors.
- Identifying those contractors who will be providing services on or after the 6th April 2021, and, if necessary, apportioning any payments for those who provide services which began prior to that date but will extend beyond.
- Communicate with your end-clients, other agencies and contractors. This includes:
- Asking private sector end-clients to confirm their size so that you can determine whether the IR35 changes apply or whether the contractor's PSC is still responsible for determining their employment status for tax purposes. Remember, there is no obligation on a private sector end-client to confirm their size without being asked to do so, so it is important that you do this.
- Check whether any end-clients are considered to be 'wholly overseas' as this will impact whether the IR35 changes apply.
- As the end-clients are making the status determination, they may not have all the information they require and may need your help in obtaining it.
- Collaborate with end-clients to implement an efficient dispute resolution process.
- HMRC has prepared a factsheet which you can give to your contractors to help them understand the changes.
- Make sure you have an internal understanding of the rules and how they apply. This includes:
- Having a process in place for passing the SDS on to the correct parties. Remember, failure to pass the SDS on may mean you are responsible for accounting for tax.
- Having a process in place to review SDS' that you receive. The end-client may have made an incorrect decision, yet still taken reasonable care, resulting in liability for tax being passed on the fee-payer (which is usually the agency). This means that it is very important that you check all SDS' that you receive and address any errors, or you face being liable for tax.
- Making sure that you have provided training to staff and nominated a person who is capable of completing an SDS' and/or any tools. You should also consider whether there needs to be an escalation process for difficult cases.
- Creating a process to review status decisions and make new ones if there is a change in the contractual arrangements or working practices.
- Ensure you have an audit process and are carrying out due diligence on the supply chain. This includes:
- Making sure you understand the contractual supply chain and audit all the parties involved. This is particularly important given the wide transfer of liability provision in the Finance Act 2020, and the widespread umbrella company scams and tax avoidance schemes.
- Keep a trail of all audits and communications of and with all parties so that you can prove that you have undertaken due diligence.
- You should maintain documents for at least 6 years plus the current year, but you should also consider whether there are any wider contractual obligations to maintain documents for a longer period of time.
- Check your contracts. This includes:
- Reviewing and updating all of your standard terms and conditions, as well as any non-standard contracts you have in place with other parties. The contract is one of the first things that HMRC will look at, so it is important that you address any risks now.
- If you are providing services through a SOW contract, you could be the organisation receiving the contractor's services and therefore may be responsible for determining whether IR35 applies. You should also consider whether you are truly providing a fully outsourced service. We will soon have an article addressing SOW contracts specifically, but HMRC has also provided guidance on contracted out services.
Finally, make sure that you test your processes, systems and controls to make sure that you are ready ahead of the changes and so that you can avoid any nasty surprises.
Status Determination Tools
Clearly there is a lot to take in when it comes to the upcoming IR35 changes and there are many tools on the market which claim to provide an SDS and accurately make a status determination. There are, however, several issues when it comes to using tools.
To name just a few:
- End-clients are unlikely to have all the information that they require in order to complete questions asked by a tool and may take a risk averse approach, leaving you, as the fee-payer, with the tax bill.
- In addition, an end-client cannot transfer liability, even if they do not make the status determination. So, if an agency completes the SDS and the end-client approves it, it is still the obligation of the end-client to complete the SDS using reasonable care, and there is a chance that HMRC could argue that the SDS was not completed using reasonable care and therefore liability will rest with the end-client. It is therefore a significant risk for the end-client to allow an agency to use a tool and make a status determination.
- CEST and other tools are not always able to make a status determination, and you may still need to seek independent advice to make the status determination.
- Different parties will have different interpretations of contractual terms, and the same arrangement may produce different status determinations depending on who makes the determination. This is why it is important to seek the opinion of an independent third party with sound legal knowledge.
- The process of answering questions is very time consuming, and the ESM's which accompany HMRC's CEST are very lengthy.
- Given the wide variety of contractual arrangements in place, one tool is unlikely to be adequately address all of the needs of different end-clients you may have.
As the IR35 changes draw closer, we will be posting more articles which will examine topics such as status determinations and SDS' and the disagreement process in more detail.
Hopefully we have helped you to understand:
- How IR35 will impact and create changes for your agency,
- Actions you might need to take before the changes come in.
For more information you may wish to look at HMRC's IR35 guidance and ESM's.
Get in touch with Stuart Armstrong at +44 (0)117 906 5056 or firstname.lastname@example.org to discuss IR35 and how we can help to help protect your agency against the risks it poses.