IR35 cheat sheet for Clients - action before it’s too late!

2nd Mar 2020

FAQ’s

1. What is IR35?

Off-payroll (IR35) legislation impacts individuals who provide their services to a client through an intermediary. An intermediary can be the worker’s own personal service company (PSC). The rule was implemented to ensure that workers who provide services directly to a client pay the broadly same tax and National Insurance contributions (NICs) as regular employees doing similar roles.

2. About the change - What, When, Why?

IR35 originally became law back in 1999 and was designed to prevent individuals who were avoiding PAYE and NICs by paying dividends.

New IR35 changes will be implemented in April 2020 for private-sector contractors. The 2020 reform will bring private sector IR35 in line with the public sector, where the reform was implemented in 2017.

These changes transfer responsibility and liability of applying IR35 correctly to the end hirer of the services - i.e. the Client - rather than the contractors themselves. If you are using a third-party intermediary - i.e. Pivotal - the liability is with them first. As IR35 is a complex tax legislation that is easily misunderstood and administered incorrectly, it is crucial to understand and be aware of how to properly determine whether IR35 applies.

3. Who is responsible for determining if IR35 applies?

As of April 2020, the end hirer (client) will be responsible for determining the employment status of each assignment as either ‘inside’ or ‘outside’ the scope of IR35.

4. What does it mean to have a role that is outside/inside IR35?

Outside: Nothing changes and the new legislation doesn’t come in to effect. If the contractor is working via a Limited Company, Pivotal London will continue to pay the contractor gross and the contractors can continue to operate as normal seeking to withdraw funds from their PSC efficiently.

Inside: The contractor must pay Tax. PAYE deductions like NICs and income tax will be made from contractors’ agreed pay rate to HMRC. Pivotal London will assist and make the deductions either by employing the contractor through one of our IR35 compliant umbrella partners, or direct.

5. What factors determine the status of an assignment as ‘inside’ or ‘outside’?

There are three key factors that need to be taken into account in order to assess the IR35 status of an assignment:

Personal Service/Substitution - Does the contractor have the right to provide a substitute under the contractual agreement?
Control - The extent to which a client controls where, when and how an individual performs their work
Mutuality of Obligation (MoO) - A mutuality of obligation exists when an employer expects a worker to undertake work when asked to do so, and the worker expects to be given work constantly.

In addition to the key employment tests above, there are a number of other factors that must be considered when looking at the IR35 status of a contract

Financial risk - How much financial risk does the individual undertake in their work? If all the risk lies with the client, then this is an indicator of ‘employment’ rather than ‘self-employment’.
Part and parcel - To what extent has the individual become part of the organisation? i.e. do they have access to staff facilities, attend staff meetings, attend staff social events or receive staff benefits?
Provision of equipment - Does the individual use equipment provided by the client, or do they use their own?
In business factors - There are a host of other factors such as multiple clients, multiple incomes, own website, stationary, employees, dedicated office space, business insurances etc. Basically, does your the PSC operate and look like a company?

6. How will clients determine the status of an assignment?

Provide a status determination for each individual assignment
Use reasonable care in making the determination
- Those making the decision should be qualified and properly trained
- Use the Governments CEST
- Always keep records of the decision and communication of the decision
Pass the determination statement to the party that it has entered into a contract with (example: Pivotal London), and the worker
Include reasons for the determination

7. What does the new IR35 workflow look like?

8. How does IR35 affect umbrella company workers?

If the contractor works through an umbrella company, they will be taxed as an employee. They will pay income tax and National Insurance Contributions on their income.

9. How will IR35 affect you and your contractors?

If the assignment is inside IR35:

Potential shortages of contract workers who may seek alternative employment arrangements (Perm / FTC / Out of Scope)
Potential increased costs of supply as contractors look to compensate for increased tax costs
Transition process due to likely contract termination and new contract initiation with a new supply model
Contract supplier due diligence - ensure you are working with credible recruitment companies that are compliant and have robust IR35 processes

10. Will you still be able to take on contractors?

Yes, you will still be able to take on contractors, but you’ll need to ensure that you determine the status of each contract and take ‘reasonable care’ when assessing if roles are inside or outside of IR35. Taking the ‘blanket approach’ to assess all roles may lead to penalties.

11. What should you do as an employer?

Log on to the Government CEST tool and run a few hypothetical tests for typical contract roles you recruit for to understand if roles are ‘inside’ or ‘outside’ of scope.
Choose a determination method and generate a robust process/audit trail for determination
Make assignment based decisions
Determine and communicate the status before hiring a contractor
Establish practical status disagreement process - contractors can dispute if the assignment is ‘inside’ or ‘outside’ IR35.

12. Are any companies exempt from new IR35 rules?

Yes, small business exception. In the circumstance that the end hirer is a private sector business and small company, the IR35 will not apply. Two or more of the following criteria are required to be classified as a small company:

Annual Turnover not more than £10.2 million
Balance sheet total not more than £5.1 million
Number of employees not more than 50

13. How can Pivotal help you?

We offer expert advice and help you manage the changes, mitigating risks of making mistakes
We can assist with your status determination and ensuring it is done correctly
We can assist with any status disagreements process to ensure you are risk-free
We can help you strategise and plan for successful IR35 preparation
We will communicate with your contractors to ensure they are properly informed about all IR35 regulations and ready to work for your company
We have a bank of contractors already working ‘inside’ IR35 via fully compliant umbrella partners

Pivotal Advice

How can clients prepare for the new rules? For clients with contractors who are affected by the new rules, it is important to start laying the initial groundwork now in preparation for the changes in April 2020:

Allocate the right resources: The medium and large companies that will soon be tasked with making IR35 decisions must take their responsibilities seriously and set aside the necessary resources.
Get a status determination/assessment process: Make initial assessments of employment status and whether IR35 rules could apply to any contractors that will be supplying their services beyond 6 April 2020.
Review and decide as a business how you want to move forward: Review existing contractual obligations and consider whether these can or should be changed where an initial assessment suggests that IR35 rules apply.
Communications: Start communicating (and potentially negotiating) with affected contractors (or agencies or other intermediaries that you contract with) where IR35 applies to a particular engagement.
Policy: Establish an internal policy on engaging future contractors and the process for making HMRC employment/IR35 status determinations on new engagements.
Start preparing now: To be in a position to implement changes successfully, it would be unwise of engagers to wait any longer.

If you'd like to know more about IR35, please get in touch here and we'll happily answer any questions you may have.