Off-Payroll working – what is it?
Most contractors probably already have a basic understanding of IR35 legislation: HMRC’s framework to try and weed out “disguised employees” – people who are claiming to be self-employed but whose work operates along lines they deem closer to an employer-employee relationship (if you’ve never heard of it, check out our previous guide here). It’s also commonly referred to using HMRC’s terminology of “off-payroll working”.
What some may not be aware of is that IR35 regulations have already undergone reform recently in the public sector, with the changes due to be extended to the private sector from April 2020. There is a consultation open at the moment which purports to inform the Government’s implementation of the new rules, but many contractors are sceptical that their voices will be taken into account.
If you already work as a contractor in the public sector, you’ll be familiar with the reformed legislation. New off-payroll working rules have applied there since 2017, and the private sector reforms are likely to involve similar changes, but with some tweaks to take into account the complexity and diversity of the private sector (have a look at our recent guest blog by Larsen Howie’s new Head of Tax, Andy Vessey, who goes over the finer details) .
The main change in the regulations is that they shift the responsibility for determining a worker’s IR35 status from the individual taxpayer themselves (the contractor) to the end client. Where the contractor is deemed inside IR35, the rules also make the fee payer (typically the recruitment company) responsible for the contractor’s tax and NIC, as well
as the employer’s NIC. The fee payer is the company that pays the worker for the work undertaken, and can either be the client or an agency, if one is used.
In practice, this means that the burden of assessing whether IR35 applies shifts to the end client and the responsibility for accounting for the PAYE/NIC due in the event there is deemed employment and the liability if any failures arose passes to the fee payer. This means that where there is a recruiter in the chain paying the contractor, they will be responsible for making the tax deductions. If there is no recruitment company in the chain, the end client will be responsible for making the determination and accounting for income tax and NI in the event there is deemed employment.
In some ways, this might be seen as a welcome development. It has long been seen as unfair that the IR35 regulation puts the onus on contractors themselves, who often benefit far less from tax relief as a result of these arrangements than their clients do. In fact, the difference is vast – Contractor Calculator estimated that 84% of the perceived “avoided” tax is avoided by the hirer, not the contractor themselves. Under the new off-payroll tax rules, if a contractor is deemed to be inside IR35, the Fee Payer will be liable for their employer NI contributions. However, in the private sector, this is not quite how things have worked in practice. Many employers have been found to deduct their employer’s NI contributions from the contracting rate, thus reducing the take-home pay of contractors.
The other big issue for contractors with the reforms is that, because they themselves face the penalties, Fee Payers (i.e. clients) are more likely to act cautiously and declare you as being inside IR35, even if you believe your working practices place you outside. This obviously puts contractors in a far worse position when it comes to tax and National Insurance, but without any of the benefits that usually come with secure PAYE employment such as employment rights, statutory sick pay, and maternity/paternity pay. Again, the likely impact of this can be seen by examining what has happened in the public sector. One of the biggest Fee Payers – the NHS – has a policy to err on the side of caution and as a result altered the status of thousands of its contractors to “deemed employees”. Experts have warned that public sector bodies typically take a “blanket approach” to these reforms, rather than examining in detail the status of each worker, and fear this will be mirrored in the private sector.
What does it mean for contractors?
Firstly, the impact of these reforms, if and when they are extended to the private sector, will depend on the size of your clients. The current proposal is that the changes will only apply to large and medium enterprises, so if you do all your contracting with small businesses (which the Government intends to define using similar criteria to the 2006 Companies Act), then you will still be responsible for determining your own IR35 status.
Those operating for large and medium companies will definitely feel an impact from these reforms, although, frustratingly, the shift in responsibility means that contractors will have a distinct lack of control over what that impact is. But preparing can help.
What should I do to prepare?
- Review your IR35 status yourself. Our recent blog on the Lorraine Kelly case outlines the aspects that HMRC uses in judgement of these cases. HMRC also provide their own tool for assessing IR35 status, called Check Employment Status for Tax (CEST). It should be noted that this tool is not fool proof, and has been subject to much criticism from contractors for a lack of nuance and producing biased results that ignore some important indicators and prioritise others. However, it’s a potential starting point (and one that may well be used by your clients when they consider your status).
- Armed with your own determination, liaise with your clients or agency in advance. Once the reforms happen, your status will be their decision, not yours, but if you have a particular view as to what your IR35 status should be and why, now is the time to make your case.
- Respond to the consultation by 28th May 2019 if you want to have your say on the reforms.
- If you believe yourself to fall outside IR35, make sure you hit as many indicators as you can. One of these includes having proof that your business has its own presence outside of your relationship with a particular client. Having your own specialist insurance, like Kingsbridge’s complete package for contractors and freelancers, is one signifier of genuine self-employment. You can sign up today on our website or by chatting to one of our friendly advisors on 01242 808740.
- If in doubt about your IR35 status, seek specialist advice. However, you can also cover yourself against the often hefty legal expenses involved in defending yourself against such as claim with Kingsbridge’s Legal Expenses policy, available as an add-on to our standard package or on its own. And with our Legal Expenses Plus policy, you can benefit from enhanced coverage for any penalties, taxes and interest that might arise from an IR35 investigation up to £25,000. Having this in place before the reforms sweep through might be a smart move.