If you are an optimistic sort there are 9 months and 1 week remaining before the new IR35 rules are implemented in the private sector. For the pessimistic amongst you, that means just 6 months left – once you write off the summer, peak and Christmas holiday period.
Whilst most larger organisations have started their project plans (thanks to the luxury of in-house legal and PMO teams), many others, particularly mid-sized firms, have yet to commence.
GRI recently created an easy to follow tool kit for our clients to feed into their IR35 approach, answering the key questions all businesses have:
“Is there a simple, tried and tested blueprint for IR35 we can follow to ensure readiness in time?”
“Will IR35 cost my business more and how can I avoid this?”
“Can I continue to use contractors?”
“How can do we protect ourselves from liability?”
“Is a blanket ban on PSCs a good idea?”
“How do I communicate IR35 changes to my business and minimise pushback?”
This blog aims to give visitors to our website a similar straightforward guide to consider, as part of their planning.
We’ll start with a little background
With all the recent headlines you would be forgiven for thinking the forthcoming IR35 rules are a root and branch change to the existing legislation. They are not.
IR35 has been around for 19 years. It was designed to combat potential tax avoidance by temporary workers/contractors supplying their service to clients via an intermediary, such as a limited company (or PSC). Since supplyng your services via a PSC meant that you did not need to pay national insurance contributions or the usual rates of income tax (and thus secured more take home pay than a PAYE worker who had these taxes deducted), it was a model HMRC felt was being abused by people claiming they were self-employed when really, they weren’t.
The solution to all this lost tax revenue? IR35 legislation to ensure that, if you worked more like an employee of an organisation under supervision, direction and control (as opposed to a truly self-employed person providing “services” how and when you wanted), you paid the appropriate taxes and national insurance contributions.
However, the original IR35 rule from nearly twenty years ago left it to the worker to determine whether they were self-employed or more like an employee. And any liability, for getting that determination wrong, also sat with the worker in terms of HMRC claims for unpaid taxes. This left a loop hole in effect, as the very people who might have a vested interest in claiming they weren’t like an employee, got to make the decision.
From April 6th 2020, what changes is who makes the determination. Going forward it won’t be the worker who decides their status. Instead organisations who engage with LTD contractors/temporary workers via a PSC become responsible for determining whether that worker, in that role, is truly self-employed or more like an employee. Liability for unpaid taxes also moves to the organisation.
In a quasi-guinea pig move, this same rule change kicked in for public sector organisations two years ago, back in 2017. So GRI has plenty of experience of how organisations prepare and navigate the inevitable challenges to their non-permanent workforce.
When is a worker truly self-employed and when are they not?
Understanding when somebody is self-employed is crucial. HMRC has produced an online testing tool which can be used – where you can stress test the circumstances of a worker’s assignment and the job that they do (or the jobs that you typically recruit for) against over a dozen questions.
At a very simplistic level the main gates which a role needs to pass to determine IR35 status are:
Certainly, for blue collar roles such as drivers and warehouse operatives, which many of our clients utilise – it’s often obvious from the very first gate what the actuality of someone’s tax status really is.
So where do you start in your preparations? Is there a successful IR35 project plan you can follow?
Tackling IR35 is a little bit like building up a jigsaw puzzle, where the final picture is only revealed with the very last piece.
There are five key tasks:
1. Determine the IR35 status of all your roles. Are these roles where workers are genuinely self-employed or not? This is key to your readiness project and will help you decide your strategy. Whilst it is the biggest part of the task ahead, it is essentially a straightforward funnel approach. E.G. taking lots of data (job roles) and analysing both the contracts and actuality of the working practices for each position.
2. From these findings, identify the critical roles to your business and the risk factors associated with your determination of whether workers in them are truly self-employed or not. For example: If you determine that all your nursing roles couldn’t possibly meet the criteria that self-employment requires, yet your nurses working for you at the moment are doing so through an LTD company, would you be at risk if your nurses decided to work elsewhere as a consequence of how you handle IR35?
3. As an organisation you only have a few options available to you in terms of the strategic position you adopt as a result of the legislation and your determination findings. But from these few options you need to know which you will pursue and thus what your communications programme will comprise of.
Which route you take will also depend on other internal and external factors that are impacting on your business. For example, does the company need the greater flexibility of more temporary staff, meaning the rationale to make more positions permanent isn’t really there? Are budgets and margins simply too tight to consider raising PAYE rates of pay?
4. Certainly, that last question around pay rates needs extremely careful consideration. Will there be one set remuneration policy going forward for all workers who previously enjoyed the higher take home pay of an LTD company rate? And will that policy be that all these workers have to move to the lower PAYE rate? Or will you agree that certain roles are the exception to the rule and may command a premium? Will you decide this up front before communicating, or leave it as a last resort bargaining chip? Could your business afford to take a leading position in the market by increasing PAYE rates, so you are the most competitive employer in your regions of operation in certain roles? In fact, tracking back, do you know where you sit amongst your competitors in terms of your PAYE rates? (This is a key advantage for our clients, as we are able to benchmark average rates per job role, sector and location and advise on top, middle, bottom percentile positions to help guide thinking). Understanding your pay rates against your competitors is vital because workers may decide to leave if they lose their LTD premium and end up on poorer PAYE rate than is available to do the same job down the road. Whilst all organisations are impacted by the LTD company rates disappearing for many of their workers/roles – not everyone will be hindered by uncompetitive PAYE rates.
5. Once your project team has pulled together the first four jigsaw pieces, the fifth is required: ensuring the rest of your organisation understands what’s going on and gets the picture. This includes your workers who may see their take home pay changing and your managers who need to understand how to handle any pushback and what they can do if someone, they see as a key person, threatens to leave. It may seem extreme but mapping out role plays can be extremely helpful for those on the front line that need to have the individual difficult conversations, once the general edict has gone out centrally.
So that’s some thoughts on how to tackle IR35, but what of the thorny questions that businesses have?
Is IR35 going to cost our organisation more?
By far the biggest question out there, after “How do we do it”, is "What are the cost implications?" The reality is, there isscope to avoid additional cost. However, this will depend on a number of variables.
i) Whether your roles are found to be in or out of IR35, which roles these are, plus the volume and scarcity of workers with the skills to do these jobs
ii) Whether there is appetite/opportunity to change ways of working for those ‘in’ scope
iii) How your current PAYE rates of pay compare to your geographic region/sector/job on offer
iv) What the rest of your sector/operators in similar geographic regions decide to do about pay rates
v) Agency margins and agency management. As a neutral vendor, GRI helps organisations control the commercials and deliverables of their agency relationships. Typically, agencies charge a higher fee for the supply and processing of an LTD company worker than they do for a PAYE worker. This could lead to agency concerns that with the conversion of LTD company workers to PAYE, their margin will drop far for them to continue to supply. This may lead to demands to increase margin.
vi) Your willingness to stand firm as pressures increase to move on rates in the run-up to the deadline
vii) Advice from your own tax advisors and legal teams.
GRI’s experience during the public sector changes (echoed by large employers including Transport for London and Crown Commercial Service) is that costs did not increase bar in one or two very niche roles and fulfilment remained at the same levels. Private organisations will not face the risk of alternate rules operating elsewhere (as was the challenge for the public sector back in 2017) and we know from our discussions with clients in the private sector, all are keen to hold the line on pay rates as few can afford to bust already tight budgets.
Can I continue to use contractors?
Absolutely. The issue is not whether non-permanent workforces can be recruited, rather ensuring the correct tax treatment of any workers hired. If a worker in a role is found to be genuinely self-employed, they are outside the IR35 roles. If the determination is they are like an employee, that worker can still be hired/retained, but their tax treatment must be correct.
How does liability work for organisations?
There are three main areas where a hiring organisation could become liable:
1. Incorrectly stating a worker is outside IR35 if they are inside. E.G Determining a worker is self-employed when they are more like an employee. Your organisation would then be liable for the unpaid tac/NI. Note if the worker is really outside IR35, the worker can complain to HMRC to get their overpaid tax back. It is not you as an organisation that pays back this tax.
2. The consultation proposes that the hiring organisation will have to provide the status determination (inside or outside of IR35) to the next supplier in their recruitment supply chain, as well as directly to the worker. If HMRC did not receive the taxes they were due because an organisation did not fulfil its obligations in issuing this determination, liability would lie with you, the organisation.
3. Liability is also likely to pass along the labour supply chain resting with the party that failed to fulfil its obligations. So, for example, the agency who didn’t send on the determination to the fee payer, or the fee payer who didn’t make deductions of income tax and NICs upon receipt of the determination. However, if any supplier in the chain is offshore, liability moves to the next UK based supplier in the chain. And if a supplier in the chain goes bust, liability moves back up the chain. Ultimately, although unlikely, liability could end-up back with a hiring organisation for these reasons. A close understanding of your agency supply chain is therefore imperative. Something which partnering with a neutral vendor like GRI, offers. At a bare minimum indemnities are advisable.
Page 15 of the consultation document gives more detail: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/783409/Off-payroll_working_rules_from_April_2020.pdf
Is a blanket ban on PSCs wise?
Whilst it may be tempting for organisations to think a blanket ban on hiring self-employed people is the best way to avoid any chance of liability. This should not be considered.
HMRC makes it very clear on page 17 of the consultation document that “applying a decision to a group of off-payroll workers with the same role, terms and contractual conditions can be appropriate in some circumstances. However, HMRC is 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.”
HMRC also go on to state that businesses may be best advised to develop and implement a process to resolve any disagreements on status determinations.
It is abundantly clear that the only way to tackle IR35 is by piecing together the jigsaw to ensure readiness.
We hope that this review of how organisations have approached IR35 in the public sector and the learnings from their experiences and those of GRI supporting them, assists your organisation in its approach.
We are always happy to hear from new organisations keen to approach their contingent labour in a different way. Our model offers a neutral vendor solution, that both controls your agency supply chain and ensures your organisation remains ahead of new legislation, like IR35.
Simply email email@example.com to discuss how we can assist.