By Charlie Wood
There are hopefully very few Contractors and Hirers of contractors left out there who aren’t aware of the changes coming on the 6th of April 2020 – that the Off-Payroll worker rules that were implemented in the Public Sector in 2017 are being rolled out to the Private Sector, albeit with a few tweaks.
For anyone who may have been too distracted by the political soap-opera that is Brexit, the main changes are listed below. The largest change will be that, rather than a PSC making an IR35 assessment, the responsibility will rest with the end-hirer to determine the IR35 status of existing Contractors and for any future roles.
Additionally, for any roles found to be inside IR35, the fee payer (in many cases an agency) must ensure that the appropriate taxes and National Insurance contributions are deducted.
What’s changing in brief:
- End hirers will be responsible for assessing IR35 status for each individual contractor and must provide a Status Determination Statement (SDS) directly to the worker and to any 3rd parties in the chain to show what the assessment result is (inside or outside) and why;
- End hirers have to take “reasonable care” when performing assessments. No official definition of ‘Reasonable Care’ yet but likely to mean: Conducting a comprehensive audit of your existing flexible workforce including the provision of the SDS; New processes and policies to reflect audit outcomes; Retaining records of the outcomes and of any changes made as a result of the assessment;
- End hirers must also have an Appeals / Dispute process in place for Contractors to challenge their status decision;
- Tax liability and responsibility for ensuring appropriate Taxes and NIC are paid falls to the Fee Payer – quite often the Agency;
- Transfer of Liability – HMRC will be able to transfer liability for unpaid taxes up the chain where there is non-compliance further down and it’s not possible for them to collect any tax due from the offending party;
- “Small” businesses are excluded from the changes meaning contractors working through PSC’s engaging with small businesses would still be responsible for assessing themselves. Small Business are defined as business that meet two of the three criteria: Annual turnover of no more than £10.2 million, a balance sheet total of no more than £5.1 million, an average number of employees of 50 or fewer;
- Self-Employment is not being outlawed and neither is working through a PSC.
You can read the full draft proposal here.
So that’s what’s coming but what will it actually mean and how will it affect both contractors and the companies looking to engage them? These are the questions that I find are being asked day-in and day-out. Unfortunately, right now, there aren’t any simple answers.
As has been reported recently, a number of the larger Corporate players are ‘opting out’ of having to deal with IR35 by no longer engaging with Limited Company Contractors. From next April onwards (and in some cases, earlier) Barclays, HSBC, Lloyds Banking Group and Morgan Stanley have all reportedly confirmed they are no longer going to engage with PSCs and will only engage with Contractors through a PAYE Umbrella route.
It’s not just the Financial Services Corporates rumoured to be going to this route. Following HMRC’s letters to it’s contractor population, GlaxoSmithKline are unsurprising going down the same route.
This is great news for the Umbrella companies, who some of you may remember were in decline 4 years ago, but leaves those contractors whose working practices mean they should be considered outside IR35 currently working with those organisations with no option to continue to engage in the same manner.
The current positions of many of these organisations also implies that no rate rises will be on offer and they will not take into account the impact on net earnings that this change will have. For contractors legitimately outside of IR35 and on day rates of between £300 – £600 this will reduce take home earnings by between 10% to 15% depending on individual circumstances.
Should the other major players follow suit, it looks likely that the majority of Contract roles coming from the Private Sector after March next year will be considered to be Inside IR35 or rather won’t give contractors an opportunity to work outside of the legislation.
I am currently advising our clients to buck this trend and actually perform thorough assessments using both the CEST tool combined with a second more objective and accurate 3rd party tool. Having recently worked with clients to develop assessment processes and having run through assessments with hiring managers, it’s clear to me that companies should find they have a mix of Inside and Outside Contract engagements moving forwards.
Indeed, this is our experience with the Public Sector who are now over 2 years’ further down the road with the Off-payroll rules and regularly look for Contract resource Outside of IR35, as well as the roles that fall inside.
The vast majority of our private sector clients are still formulating their strategy for dealing with the Off-Payroll worker rules. By 2021 we will have a new ‘normal’ and will likely see a balance of both inside and outside roles released across the market with relevant rate cards to match but, given the decisions we’ve seen so far and the additional geo-political pressures facing us all, it’s fair to say the Contract market is in the midst of massive disruption and 2020 will be a turbulent year for all.
As always, above all we are here to help and will provide advice and guidance to any of our clients and candidates who require it.
My current advice to both clients and candidate is detailed below but please feel free to reach out to me or the team at Head Resourcing directly if you’d like to learn more.
With less than 6 months to go, the time to act is now!
- Approach this with an open mind. What might be right for one company, isn’t necessarily the correct decision for another.
- For end-clients, the most important thing you can do is to get an understanding of the law & set up a change programme to cope with the legislation change.
- Begin the conversation now with your supply chain and your off-payroll workers about how best to manage the new rules and define a suitable assessment process for your current Contractor population whilst also looking at the internal process for assessing future requirements.
- Begin an audit to understand the current profile of your off-payroll workforce, how they are currently engaged and therefore the scale of the change to be managed. RAG status your flexible workforce so that you understand the impact any loss of resource would have on current projects and areas. Gain an understanding of the potential financial impact that an Inside classification would make to your contractors and whether or not you would be prepared to increase any day rates to mitigate that impact.
- Develop your internal process for assessing future requirements – will the SDS be produced at the same time as the business case for example?
- Begin to develop your Assessment Appeals process
- Assess future Supply models for interim & Flexible resource and put in place supplier agreements to facilitate the appropriate solutions
- Understand the Law and the changes coming
- Engage with your Agency and end-client to gain an understanding of their strategy and implementation plan. Given the legislation isn’t yet published, strategies will still be being discussed and devised so please don’t expect a conclusive decision for the moment.
- Audit your Limited Company business practices – do you run your PSC as a business? (How do you market yourself? Do you have an office? Etc.) – Truly self-employed individuals need to market their business and skills externally and should be able to demonstrate how they run their business rather than just use a PSC as a vehicle to perform the role of an employed individual.
- Calculate the minimum rate you’d be willing to accept for roles inside IR35 – Whilst there will still be some roles outside IR35 following the 6th of April next year, our belief is that, at least initially, the majority of contract roles will be released as Inside IR35. Will this still work for you as an individual and if so, what is the minimum rate you’d need? NOTE: this isn’t the equivalent rate to cover the additional Tax – it should be accepted that roles won’t be as profitable and Perm roles may be more lucrative in the short term.
- Identify relevant, similarly skilled potential Substitutes in your network who would be willing to work through your PSC should the need to substitute arise – If you can provide potential clients with a list of very similarly skilled individuals it may provide come comfort when it comes to the substitution Assessment questions.
- Review both contracts and working practices against the IR35 legislation – Make sure your working practices differentiate you from Permanent employee’s and that contracts are IR35 friendly
- Decide on your approach to inside IR35 roles, should you be willing to engage – PAYE, Umbrella or Deemed employee etc. and speak to both your Accountant and Umbrella companies to find out which route is best for you.