April 2021 IR35 Intermediaries Legislation for Contractors

So potentially lots of work to undertake as you move through this transition into a potentially more taxing future.

The consultation document was launched in March 2019 with a closing date for comments of 28^th May 2019.

As anticipated, the general principals of the legislation proposed for the private sector remain consistent with the existing public sector legislation with the following exceptions:

• Small businesses (as defined within the Companies Act) will not be subject to the legislation and will be able to engage contingent workers through their PSCs as per the current IR35 rules without determining employment status.
• Large unincorporated entities (50 or more employees and/or turnover exceeding £10.2 million) will be included in the legislation.

Also, HMRC said they:

• Recognise the importance of providing organisations with sufficient time to prepare for and implement the reform, hence the implementation date of April 6^th, 2020.
• Are committed to continuing to work with stakeholders to explore enhancements to the Check Employment Status for Tax (CEST) service and associated guidance.

The outline of the changes for impacted organisations is:

• All non-payroll roles will require a status determination to be undertaken. Check Employment Status for Tax (CEST) or any other suitable tools may be used to support the decision.
• The recorded determination should be shared with all parties in the supply chain.
• Applying a decision to a group of off-payroll workers with the same role, terms and contractual conditions could be appropriate in some circumstances. However, HMRC is clear that it is not right to rule all engagements to be within or outside of the rules irrespective of the contractual terms and actual working arrangements (blanket decisions). Where reasonable care has not been taken to reach a decision, the liability for paying the income tax and NICs can transfer to the hiring organisation.
• In-Scope roles will place a liability on the fee-payer (agency/client) to collect and pay all employment related taxes (PAYE &NIC) from fees that are due to the workers PSC. Where applicable this includes the Apprenticeship Levy
• Where an umbrella company employs a worker directly as an employee and does not contract with the worker’s PSC, the off-payroll working rules do not apply.
• Out-Scope roles will allow the fee-payer to pay the workers PSC the fees due without any deduction.
• Where the fee-payer is off-shore the liability will move up the supply chain to the next UK-based entity.
• Any engaged worker will have the right to request the reasons for a determination, which must be provided within 31 days of the request.
• Failure to provide such determination will move the liability from the fee-payer to the client if more than one party is in the supply chain.
• The government intends to introduce a framework for resolving disagreements over employment status decisions. They believe that the most effective approach would be for clients to develop and implement a process to resolve disputes based on a set of requirements set out in legislation.
• If HMRC were unable to collect any outstanding liability from any party in the supply chain, it would have the power to move it up the chain all the way back to the hiring organisation.
• The worker’s PSC will no longer be permitted to deduct a 5% allowance concerning engagements with medium and large-sized clients.

What next?

Whilst we currently await the response from HMRC to the consultation exercise and their detailed plans for the legislation it would be negligent to assume that no legislation will be passed. The detail may not be i’s dotted and t’s crossed but the general principals appear to be in place to allow organisations to begin a process of discovery and planning. Have a look at the next section for some ideas about what may be done.

The legislation impacts any “public authority” where a public authority as defined by the Freedom of Information Act 2000 or; a Scottish public authority as defined by the Freedom of Information (Scotland) Act 2002 (asp 13) or; Corporate Officer of the House of Commons or the House of Lords or; the National Assembly for Wales Commission or; the Northern Ireland Assembly Commission.

The most significant change was to pass the responsibility for setting the IR35 status from the worker (PSC) to the hiring organisation (Client) and moving the liability for any unpaid taxes (plus any interest and fines) to the fee payer (Hirer or Agency).

In taking the IR35 status decision, the organisation must take reasonable care in coming to its conclusion and failure to do so or failure to provide such determination could see any liability move from the fee payer back to the hiring organisation.

HMRC developed and have made available a web-based tool called CEST (Check Employment Status for Tax)  which they say will help hiring organisations determine IR35 status, though interestingly it is not prescribed. HMRC do however state that where CEST is used “correctly” they will stand by the decision provided.

So, from April 2017, all roles that are filled by non-payroll workers have been identified by the hiring organisations as IN or OUT of scope with regards to IR35.

Where the decision is IN, i.e., the Intermediaries Legislation applies, and PAYE/Employers NI become payable by the fee payer on any sums paid. The worker is treated as an employee for taxation purposes but gets no employee rights under employment legislation.

Where the decision is OUT, i.e., the Intermediaries Legislation does not apply and the non-payroll worker can continue to operate their Limited company PSC outside of the IR35 net.

The fall out:

Naturally, this change met with large scale opposition from many workers, accountants, lawyers who saw it as a threat to their wealth and wellbeing. At the same time, agencies had new liabilities to contend with and hiring organisations saw a significant amount of additional effort for no real gain.

Within a short period, HMRC was calling the implementation a massive success with increases in permanent employee numbers and increased PAYE and NI contributions.

In reality, the following was seen:

• The departure from the public sector to the private sector for those workers with transferable skills, leaving some public sector bodies unable to staff their ongoing and new projects.
• Increased days rates for essential workers captured as IN-Scope to cover any shortfall in their earnings.
• Increased use of consultants to deliver work at a higher cost than previously used contingent resource.
• Blanket decisions in departments such as the MoD which captured all contingent workers as In-Scope with no right to appeal.
• High closure rates of PSC’s as they were forced to switch to using Umbrella companies who became the fee payer deducing all relevant taxes.
• Significant increase in the use of Umbrella schemes that reduced the impact of the new levels of taxation on workers earnings due to IN-Scope determination. This occurring despite the HMRC’s 2019 loan charge legislation which is looking to address historical abuse of payment through loans.
• Workers reporting significant fall in take-home pay after paying payroll taxes and also funding the employers NIC elements from their day rates.
• Unknown levels of workers being taxed as employees due to incorrect IN-Scope determinations.
• The accuracy/usefulness of CEST has been an ongoing issue between the accountants/lawyers and the HMRC regarding its recognition or otherwise of case law built up around IR35.

The creation of two markets (Public/Private) and the different modes of operation were always going to be an issue in that the real impacts of the change could not be seen and some workers would have an escape route to the private sector. From the Government/HMRC’s point of view, it was seen to be a necessary stepping stone so that the private sector could not point fingers and demand that they get their own house in order before implementing such dramatic changes.

Made a change, it certainly has, though it would appear that there are many further steps to be taken before it will be seen as fair to all.

Further reading:

• UK – Public Sector Off-payroll working rules (Feb 2017)
• UK – Disguised remuneration charge on loans (Feb2019)
• Report – 2018 Project Management Benchmark Report (Feb 2019)
• Report – 2018 Project Management Snapshot Report (Nov 2018)
• Report – 2018 Project Management Benchmark Report (Feb 2018)
• Report – IR35 and its Impact in the Project Management Domain (Nov 2017)

A key point in the legislation was that the onus for adherence was placed on the worker (PSC). As such, hirers and other parties in the supply chain could easily take steps to ensure that they removed any potential liability to HMRC by insisting that all contingent (non-payroll) workers were supplied through a Limited company (PSC).

As is usual when new legislation is introduced there were, of course, many unintended consequences which led to (in HMRC’s view) widespread non-compliance and a significant drop in revenue raised through PAYE and Employers National Insurance.

A new industry was created around IR35, with accountants and lawyers working to support and offer protection to the ever-increasing number of PSC’s from the grips of HMRC. Meanwhile, many organisations appeared to see the protection provided by IR35 as a way to reduce their liabilities and costs and encouraged workers to re-engage through a PSC.

For HMRC, managing non-compliance became a major headache as they were unable to muster sufficient resources to cope with the proliferation of PSC’s. It appeared that the chances of being caught were low, so the risk and reward analysis for many contractors tipped in favour of taking the rewards.

Since 2000, significant case-law around IR35 has been created and both the HMRC and the PSC’s (and their representatives) have claimed significant wins along the way. Details can be found on the web, a selection of further reading can also be found at:

• Contractor UK
• IPSE
• Qdos