The Chancellor has announced that the off-payroll rules, which were introduced in the public sector last year, will be extended to the private sector with effect from April 2020. This is following submissions from PayStream, the recruitment industry, ICAEW, CBI and others that the legislation should, at least, be delayed to assess the real impact that the public sector changes have made.
The Chancellor has also indicated that the rules will not be applied to small businesses. Presumably only businesses with turnover over a certain threshold will be affected (banks for example).
For the recruitment industry this means that from 2020 any recruitment business that places PSCs with big business will need to consider the IR35 status of an assignment before offering it to a PSC. This is a big piece of work but at least we have a year to prepare.
The issue for recruitment businesses will be that if they do not correctly identify an assignment as inside IR35 and they continue to pay the PSC gross, they may be liable to pay PAYE and NI on the assignment income (over 30% of the gross paid) to HMRC if the assignment is found to be caught by IR35.
There are circumstances where this liability may be passed up the chain to a client (e.g. if the client has failed to assist (when asked to do so) in making an assessment) but the reality is that it is the recruitment business that will be on the hook in the vast majority of cases.
What does the legislation actually say?
It has not been published yet but it is likely to follow closely the public sector rules that can be found here.
The main thing to note is that it requires the fee payer (usually the recruitment business) to calculate and pay employment taxes to HMRC before making any payment to a PSC that is caught by IR35. This substantially reduces the overall take home pay of the contractor. An example of the impact for a worker currently on £1500/week is set out below.
How is status assessed?
The IR35 rules haven’t changed and have been in place since 2000. PayStream’s simple guide to IR35 can be viewed here for an explanation of IR35. In a nutshell, the legislation says that people who work like an employee (as opposed to someone running their own business) should be taxed like an employee. Various factors are taken into account such as:
- Substitution – can the PSC send anyone to do the job (subject to having the right skills) or does it have to be a named individual?
- Control – who controls how the work is done? Client or contractor?
- Part and Parcel of the organisation – is the worker clearly an external contractor or has he/she become ingrained within the business?
- Mutuality of obligation – is there an obligation for the client to provide the contractor with work, and for the contractor to accept work offered?
There are many other factors that need to be weighed before a decision is reached – our what helps/hinders IR35 infographic helps to explain this in more detail - and even HMRC finds it difficult to make the decision which is evidenced by the number of cases it loses (in the last 10 years 9 out of 12 taken to Tribunal).
HMRC expects clients, recruitment businesses and contractors to make these tax decisions and has therefore built an online tool (called CEST) which can be used to help ascertain IR35 status.
Over the next 12 months recruiters will no doubt try out the tool to get an idea of the kind of things HMRC thinks you should consider when making an IR35 decision. The tool works for clients, agencies and contractors.
Feedback on the tool has not been positive as it disregards some of the factors a court would consider in determining status (generally ones that would lead to an outside IR35 decision) and it too often returns an “unable to determine” verdict. Even HMRC has been forced to admit that the results are not always reliable.
Nevertheless, it is a good starting point for those with no knowledge of IR35 and can be used in conjunction with other processes to determine status. HMRC has said that it will accept the CEST decision if the questions have been answered correctly (as HMRC would answer them).
There are also specialist accountants such as PayStream that have IR35 departments which carry out reviews that are more thorough than using CEST alone. We expect that our contractors may ask for a review to assist with an argument that they are outside IR35.
What happened in the public sector and what can we learn?
Public sector bodies were told by Government (and this was backed up by the off-payroll legislation) that they had to make a determination on IR35 status for all public sector roles. Our experience was that many public sector bodies said that all roles were caught to avoid any potential liability. This approach was challenged by recruitment businesses (since it made it more difficult to fill roles) and contractors (since take home pay was substantially reduced) with varying degrees of success. Some bodies, like TfL, initially determined all roles to be inside, but following a backlash from contractors and agencies put in place a team and a system to assess roles. This included using a small number of third party experts such as PayStream to assist Tfl (and the recruitment businesses) to carry out reviews. Other bodies, such as NHS trusts, maintained the position that everyone was caught.
Many contractors switched to umbrella or agency PAYE as they realised that they would no longer be better off in a PSC (after deductions) and didn’t want the hassle of running a company. PayStream provided our PSC clients (who requested help) with illustrations to help identify what the financial difference might be (see example above).
There were a number of recurring problems:
- Clients did not understand the changes (and these were big clients!). This led to blanket “caught” decisions which was bad news for everybody. This time many recruitment businesses have begun to educate the clients and contractors by way of seminars.
- Payroll Software didn’t work with the new rules meaning that paying a PSC in accordance with the off payroll rules was not an option. This often meant a switch to umbrella or PAYE.
- High street accountants didn’t understand the new rules and challenged deductions made as “wrong.” The unusual treatment around VAT also caused problems. PayStream produced a set of FAQs for PSCs which helped. These will be updated and made available to our PSC customers.
What will recruitment companies do?
No doubt over the next 12 months recruitment businesses will work with clients to educate them about the coming changes and to start to consider the IR35 status of an assignment.
What will contractors do?
Contractors will also pay more attention to the IR35 status of an assignment and as April 2020 approaches will look for roles advertised as outside IR35.
How can PayStream help?
PayStream has an IR35 team (unlike most accountancy practices) which helps contractors understand their IR35 status. We have recently developed an online IR35 review service which will make it easier and quicker to reach a decision.
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PayStream's 2018 Budget Round-up
“A Budget for hard-working families – the strivers, grafters and carers”. This was Chancellor Philip Hammond’s description of his 2018 Budget – the last before Brexit.Read more here