Whilst I feel it is hard to imagine that any contractor or employer is not aware of the Off-Payroll Working (IR35) changes that are due to be implemented on the 6th April 2020, recognising and acting on the window of change is quite a different matter.
As I write we are 21 working weeks (taking out 2 weeks for Xmas and New Year) or 105 working days away from the 6th April implementation date! So, either way the reality is that we are well into the window of change.
Some commentators, contractors etc. are still hanging onto the hope that the Government will back down and see the error of their ways, thus leaving the private sector to its hands off “not my responsibility guv!” approach to engaging PSC (Personal Services Company) labour. With a playing field to level and additional low hanging tax revenues to be had, not to mention the current political distractions around Brexit, it would seem unlikely that such a scenario will play out.
Not Engaging, Bankers Leading the Way!
We have recently seen several financial services organisations (Barclays, Lloyds TSB, RBS) set out their stalls in relation to the changes. Barclays appear to have implemented aggressive action plans to remove ALL PSCs from their workforces. It would appear that they have decided not to engage with the new legislation by changing the profile of how they engage labour, rather than getting involved in working out if a PSC contractor is IN or OUT of Scope of the legislation and implementing the required side processes.
They have also removed their direct risk associated with scoping decisions, though some indirect risk may remain in their supply chain should it fail to pay HMRC. The decision to not engage with PSCs means that their current PSC workers will either:
Show me the money!
PSC workers who are offered a full employment package will have an interesting decision to make about their future both in terms of lifestyle and their working lives. One assumes that the organisations are going to recognise their current levels of income and make offers that facilitate an easy decision to convert.
Should I stay or should I go!
The remaining contractors may have a tougher decision to make about a request to be re-engaged on a PAYE basis, which for some could mean the closure of their Limited company.
These contractors will possibly have 4 options:
- If acceptable to the hiring company, keep their PSC but find an “acceptable” intermediary who will process their fees and deduct all applicable payroll taxes and pay them the net amount.
- Keep their PSC in the background for future assignments and convert to an “acceptable” Umbrella company as an Agency Worker for the duration of the offered engagement. They will then become an employee of the Umbrella which will deduct all applicable payroll taxes, plus a management fee.
- Ditch their PSC and sign up with an “acceptable” Umbrella company as an Agency Worker; assuming that future assignments are likely to be also classified as In Scope of the legislation, thus rendering their PSC an unnecessary overhead.
- Resign and try to find alternative assignments where they will be able to operate Out of scope of the legislation through their PSC.
Who pays the Taxes?
For example, an outstanding liability from, say Umbrella XX, who went bust overnight owing the HMRC £200K would drop back into the next organisation(s) in line in the supply chain. This change in risk profile will probably see much more active management (self-policing) of intermediaries in the supply chains to reduce the risk of transference happening, should a company go bust owing money to HMRC.
All Contractors who re-engage on a PAYE basis will also need to understand the financial implications of taking this step and develop a plan to try and maintain their level of income. It is key to remember that the following deductions will be taken from whatever daily fee they negotiate:
- Employers National Insurance – 13.8%
- PAYE – As calculated by the intermediary’s payroll software
- Employees National Insurance – As calculated by the intermediary’s payroll software
- Apprenticeship Levy – 0.5% assuming intermediary’s payroll >£3M per annum
- Management Fee for intermediary’s services
Our experience in the Public sector when the rules came into force were that many contractors who were forced (take it or leave it) into re-engaging on a PAYE basis did so on their existing day rate and had to absorb all the extra deductions.
Additional Spend with System Integrators/Consulting Firms?
What the banks haven’t said, but what may well happen is that their spend on PSC Contractors will morph into much higher levels of spend with the Systems Integrators (SI) and Consulting firms; as many suggest happened when the changes were implemented in the Public sector.
By paying a premium rate, the hiring organisation can still get the job done by a SI/Consulting firm supplying the resource under a Scope of Work or a call off agreement. For the hiring organisation with sufficient budgetary resource, the beauty of this arrangement is that the compliance liability moves from them to the supplier. Happy days!
The use of Systems Integrators and Consulting firms has provided an unexpected upside for some consultants working in the Public sector as they have seen a new source of work appear and not only that, the rates have been higher due to the day rates being charged to the end client!
On the downside, they have not been able to operate their PSC’s as the roles are In Scope but the increased rates mean that even after the additional deductions they are making more money.
Whilst this is unlikely to happen across all companies within the Private sector there will more than likely be many organisations where it does.
Organisations Engaging with the Legislation
Many organisations will choose to engage with the new legislation and take the necessary steps to decide if their current PSC workers are In or Out of scope. They will then formulate procedures for processing future opportunities which require them to engage non-payroll workers. Realistically this is an activity that needs to be underway now, as the available time to check, decide and act is rapidly running out.
Existing PSC Contractors
The key change in the legislation is that the need to determine if an assignment is In or Out of scope will move from the PSC to the hiring organisation. The liability associated with this decision also moves from the PSC to the fee payer.
As such it is crucial that organisations audit their workforce to understand if they have any off-payroll workers, how they are engaged and the mechanisms being used to pay them.
If PSC contractors form part of the supply chain, each role will need to be assessed and classified as either In or Out of scope. The “determination” will need to be documented and shared with all parties in the supply chain (Agency, Worker) and acted upon. Tools such as the HMRC CEST (Check Employment Status for Tax) are available to facilitate this decision-making process.
If the decision is Out of Scope the worker can continue to supply services through their PSC and payments continue as a business to business transaction.
If the decision is In Scope the worker will need to be re-engaged on a PAYE basis. As discussed above, there are options around how this can be done mechanically but potentially some hurdles to address if workers are to be retained and the organisations business is not to be disrupted.
As with the banking examples, some organisations may look to offer permanent employment, some may engage in discussions about compensating potential losses by increasing remuneration levels and others may be happy to lose contractors and then look for replacements.
For any PSC contractor who is engaged with an organisation on a contract that will result in payments being due on or after the 6th April 2020, it is in your own interest to start a conversation if this has not already happened. As discussed above, have a plan and understand how this could impact your income.
Status of New Roles
The need to implement a process for determining the status of new hiring requirements is more pressing as each week goes by.
As highlighted earlier, we are 21 working weeks way from the 6th April 2020, so depending upon the payment terms that means we are rapidly approaching the point where any new contract greater than 4 months in duration and on 30 days payment terms will be impacted by the new legislation.
If an organisation wishes to continue engaging with PSC Contractors they will need to be able to provide a determination as to why the role is Out of Scope so that the roles can be advertised and filled on such a basis.
All In-Scope roles will need to be advertised and filled on a PAYE basis.
Any PSC contractor who is actively looking to secure a new engagement which is > 4 Months (at the time of writing) needs to raise the flag and ask about the status determination as they could be impacted by the new legislation and require a contract re-negotiation early in 2020.
Organisations Exempt from the Legislation
If a hiring organisation is classified as a “small business” they are exempt from the new legislation.
Small business, as defined by the Companies Act 2006, means meeting two or more of the following criteria:
- Annual turnover is no more than £10.2 million
- Balance sheet total is no more than £5.1 million
- No more than 50 employees.
Where the end-client meets two or more of these criteria, responsibility for determining the IR35 status of a contract remains with the PSC.
The legislation will include clauses that prevent medium and large businesses establishing small subsidiaries through which they can procure the services of PSCs to skirt around the legislation.
However, genuine small businesses such as Arras Services can provide PSC Project Management practitioners to medium and large Private sector organisations under a Statement of Work contract. Such an arrangement can relieve the hiring organisation of the administrative burden and allow the PSC to manage their own business affairs. Another potential win:win:win. Contact us for more information or to discuss how we could work together.
Finally, Don’t Get Caught Out!
If you take nothing else from this blog post, ALL PSC CONTRACTORS need to be aware that the new legislation means that all monies RECEIVED from the 6th April 2020 will be subject to the new tax regime, regardless of when it was delivered or invoiced. Make sure you are on top of your timesheeting, invoicing and payment collections.
We have created this as a decision tree for UK based Contractors with an active Assignment: