Carousel_Arrow Chat icon_cookie IHT_trust_wills IR35 Combined Shape 2 Group 10 Login Mobile Menu Share Share Email SubMenuMobile Group 9 VAT View_Gallery View_List capital_allow Triangle 2 Copy Close construction cyberpro employment_tax_shares emplyer_solutions entrepreneurs_corps fee_protect Group 7 grant_fund Group i_Clock i_Consult i_Done i_Eligibility_Tick i_Enter i_Filter i_HMRC i_Negative i_Play i_Plus i_Reset i_Support_Legal i_Support_TaxDesk i_Support_VAT i_Tick noun_marketing_1872083 noun_online_2126759 i_download i_meet Group Copy 24 Group 18 noun_electrical_1240755 copy noun_Technology_2125422 noun_Science_2031115 i_tick_bullet_block international_tax patent_box private_client property_sdlt r_and_d reliefs_incentives Search specialist_tax status tax_indemnity valuation
Markel Tax

19 Nov 2019

IR35 Private Sector changes: FAQs

The indefinite wait for final IR35 legislation for off-payroll working in the private sector continues. The autumn budget was everyone’s expected avenue for some answers, but now a 12th December election could mean that it might be the New Year before we get a budget. As a result, we are still kept in the dark as to when the final legislation will be released.

The time to plan for change is getting ever shorter, but the real problem is, what does everyone plan for? If previous performance is anything to go by, the final legislation could be released as late as a week before the new tax year. While we don’t expect there to be any material differences from the draft proposal there may be some tweaks to the final form.  
 
You may be wondering, what you should do next. You may have read announcements from some of the banks or be concerned that your end client is not taking on contractors through personal service companies (“PSCs”) post April.  You may also be concerned that your end client will treat your engagement as inside IR35 from April onwards.  We have already provided our examination of the draft legislation (https://www.markeltax.co.uk/industry-news/the-private-sector-legislation-has-landed).  This article seeks to provide answers to some of the frequently asked questions on the proposed IR35 April 2020 changes in the private sector.
  1. Who is the fee-payer?
The fee-payer is the party that is responsible for applying the correct tax treatment to the PSC following a client’s Status Determination Statement (SDS). If the client’s decision is that the engagement is ‘caught’ by IR35 then the fee-payer is responsible for deducting tax and NI.
 
If there is no agency in the contractual chain then the client can also be the fee-payer as well as the decision maker.

The fee-payer will typically be the party that is directly above the PSC in the contractual chain (the party paying the fee to the PSC), however the legislation also provides that if any party in the chain fails to pass on the SDS, then that party assumes the responsibility of “Fee payer”.
  1. How should the end client make the IR35 status decision?
The draft legislation requires that the end client undertakes the following:
  • The client must take “reasonable care”
  • The client must produce a Status Determination Statement (“SDS”) providing their reasoning for their decision.
  • The SDS must be communicated to the entity immediately below the end client in the contractual chain and to the worker
  • If the SDS decision is challenged, the end client must give a ‘reasoned response’ within 45 days
Failure to do any of the above, could lead to the end client being deemed the ‘fee-payer’; i.e. responsible for paying the tax and NICs.
 
Please be aware that this information will only need to be provided for engagements commencing in the new tax year. Until that point it is still the PSCs decision to make and its liability in the private sector.
  1. I believe my current engagement  falls ‘outside’ IR35, but my client is saying that they will treat it as ‘caught’ by IR35, is there an increased risk of HMRC opening an enquiry retrospectively?
From what HMRC are saying it appears there won’t be increased risk but as ever, the risk of enquiry is always there. In the summary of responses to the March consultation* at point 2.6 HMRC stated:
 
“HMRC compliance teams will be providing support and guidance to organisations to help them implement the off-payroll working rules and it will not carry out targeted campaigns into previous years when individuals start paying employment taxes following the reform.”
 
In a HMRC policy paper published on 22 October 2019** they also stated:
“HMRC have taken the decision that they will only use information resulting from these changes to open a new enquiry into earlier years if there is reason to suspect fraud or criminal behaviour”
 
While this is not closing the door on retrospective enquiries, it indicates HMRC’s focus is forward facing.
  1. My client is saying my engagement will be treated as ‘inside’ IR35 post April 2020; I disagree, what can I do?
In the first instance, you should consider having your current engagement reviewed so that  you have an independent expert opinion of its IR35 status. Your client is more likely to be reassured that they can treat an engagement as not caught in the new tax year when   provided with a comprehensive report with a clear and reasoned ‘not caught’ opinion on IR35 from a status specialist. 
 
 Where Markel Tax has reviewed an engagement and deemed it ‘not caught’, we will stand by our opinion and those PSCs who have had the benefit of the Markel/Abbey Tax Professional Expenses (Tax Investigations) Insurance can testify to how robustly we defend someone who is under enquiry by HMRC.
 
The second action you can take is contained within the draft proposals, which state that you can challenge the client’s SDS decision (see Q2) and that the client must put in place a client- led disagreement process.  Although, there are no guidelines on what this must look like, it   merely states an internal appeals process must be applied.
  1. My client is taking a blanket approach, can they do this?
As mentioned above, the client must take “reasonable care”. Where a blanket approach is   taken, arguably it would suggest they have not taken “reasonable” care as they have not considered each engagement entirely on its merits, rather, just applied a “one size fits all” method. What is considered as reasonable care is undefined and down to individual  interpretation.
 
HMRC stated in its off-payroll consultation in March 2019 that it was “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”. However, it is not clear how they would police blanket ‘inside’ decisions nor that it is in their interest to do so because such an approach is revenue raising. Perhaps some of the banks have got round this by declaring that they will no  longer use contractors engaged via PSCs.
  1. My client is stating they will no longer contract with PSCs, is this taking “reasonable care”?
In this scenario, the end client isn’t considering IR35, so arguably taking “reasonable care” isn’t an issue. An end client acting in this fashion is not acting against the letter of the law,  but whether it is in the spirit of the intended legislation is another matter entirely. It would  seem that the only options available under a blanket ‘not using limited companies’ approach are PAYE: employment (full-time/fixed term), working via an umbrella company or as an agency worker.
  1. I am working on an engagement that runs beyond April 2020 and the client is happy for me to remain ‘outside’ IR35, will I need a new contract?
The end client will have to issue you with a Status Determination Statement and is likely to include references to the new legislation within the contract. On that basis there will have to be an addendum to an existing contract but more than likely the client will want to issue new terms.
  1. The end client has offered me a permanent employee position. If I accept it does that automatically mean my current engagement with PSC is caught?
 No.  Whether your current engagement is caught or not will depend solely on an examination of the current relationship – the contractual terms and the working practices. 
 
Where an individual moves from contracting to take up an employed role there will be a significant contractual change to the relationship and the role on offer is also likely to differ; e.g. most employed roles will include additional requirements such as conduct, disciplinary and grievance procedures (as well as other fundamental changes to the way in which work is carried out) which should not be contained in your contract for services.
 
HMRC is unlikely to take the same approach to an engagement that was ‘contracted out’ and then becomes employment than it is vice versa. We are unable to provide any guarantees but from the statements HMRC has issued so far (see response to Q3), it appears their focus is on getting things right moving forwards rather than chasing tax retrospectively.
  1. I have been offered an engagement via an Umbrella Company, what does this mean?
Umbrella companies are not all alike, and the term “umbrella” is used to cover a multitude of different operating models.  In a typical, compliant, umbrella company you will be an employee of the umbrella company and so you will be paid under PAYE as any employee would be.
 
 As an employee you will be entitled to all the normal protections and benefits of any employee (such as holiday pay, national minimum wage, maternity/paternity pay etc). The umbrella company is a service provider and it charges agencies/clients for its company services. The fee that is quoted by an agency to the umbrella company is the umbrella company’s rate (and not the rate you will be paid yourself).  
 
From the money received by the Umbrella company you will receive salary (at least NMW for every hour worked) and holiday entitlement and you will be auto-enrolled into pension.  The umbrella company will also account for its own operating costs from the money it has received, which will typically include its margin, employers NI, pension contributions and apprenticeship levy.
  1. Are all end clients obliged to make the IR35 SDS?
Where the end client is a small company (as defined by the provisions of section 382(3) of Companies Act 2006) then they are exempt from the new proposals and the PSC will remain responsible for determining whether an engagement falls within IR35.
 
If the end client is a medium or large business then the new rules will apply. This will mean it the end client who is responsible for making the decision and it will be the fee-payer responsible for ensuring the correct tax treatment is applied. Ideally, a new contract should be issued at the date the legislation changes
  1. My end client and agency are offshore, who makes the SDS?  
HMRC stated in the March Consultation*:  
 
“Where the agency or third party that would be the fee-payer is offshore, the liability moves to the next person above them in the contractual chain which is in the UK. If only the client is in the UK then they will be the liable party. Where a party in the contractual chain, including the client is outside the UK but the off-payroll worker performs services in the UK, fee-payers must still deduct tax and NICs.”
 
This suggests that where both the fee payer and the end client are based outside of the UK, the liability for determining the IR35 status of the engagement rests with the fee payer.
 
Arguably, if the client is abroad they do not meet the UK Companies Act definition for medium/large companies as they are not based in the UK and therefore not subject to the UK legislation. However, it comes with the caveat that there appears to be no rational or sensible answer from HMRC and all they have to offer is the reference above from the March consultation.
  1. Who will be liable in the event of an HMRC challenge to the IR35 status of an engagement?
The public sector legislation which came in April 2017 introduced the concept of a fee-payer which is the entity responsible for paying the PSC. Where an end client engages a PSC directly, they are both the decision maker and fee-payer. However, where there is an agency or a number of agencies in the contractual chain it is the agency closest to the PSC which will be the fee-payer and therefore have the liability where tax and NICs have not been correctly deducted.

Conclusion:
 
It appears end clients are going to be the one facing the biggest challenge in that they may not have even considered IR35 before. However, going forward they will need to seek specialist advice to fully understand and be able to make an informed decision on the status of an engagement and pass this down to the relevant parties.
 
Agencies need to be able to rely on an end client’s decision in order to apply the correct tax treatment. The agency which pays the PSC will be the fee-payer and therefore have the liability even if the decision made above them in the contractual chain proves to be incorrect (as long as the end client has fulfilled their statutory obligations). So even though client’s may face the biggest challenge, it is ultimately the fee-payer that has the biggest risk.
 
Likewise, it remains that there is still no clearer answers for the contractors and what it means for them in the future, particularly, where we have seen recently the banking industry taking a ‘no contractor’ route.
 
What can we do to help?
 
We are leading IR35 specialists winning the first successful Tribunal case (Lime IT) under our previous  Accountax brand and have been successful in defending contractors ever since. We can provide contractors with a comprehensive report providing our opinion on the IR35 status of an engagement. If you do not currently have a contract in place, we can offer a contract drafting service.
 
For agencies and end clients we can assist with your 2020 preparation including review of contracts and working practices and how to compile an SDS.
 
If you are a contractor, agency or end client preparing for the upcoming changes and would like us to review your engagement, please contact our specialist team on 0345 0660 035 or by email at IR35@markel.com
 
*https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/822204/Off-payroll_working_rules_consultation_summary_of_responses.pdf
**https://www.gov.uk/government/publications/hmrc-issue-briefing-reform-of-off-payroll-working-rules/hmrc-issue-briefing-reform-of-off-payroll-working-rules
 
 
Tagged IR35
Next article in series

19 Nov 2019

IR35 in the Private Sector: Protecting 'fee payers'

Whilst we wait for the election to unfold and then hopefully a government to be formed and then early in the new year a budget, forward thinking agencies who will be fee payers in this new regime and some end clients who engage directly, are worried about the implications of getting the decision wrong.