IR35 – Your questions answered
Russam have been navigating through IR35 since 2000 and ensuring that the contracts we agree are fully compliant from start to finish. This article answers questions you may have about IR35 and if you require further help please get in touch.
Which companies are exempt from undertaking IR35 status determinations?
Only those that meet at least two of the small company exemption criteria. During a 12-month period turnover cannot be higher than £10.2 million; balance sheet total not higher than 5.1 million and number of employees no more than 50. Companies that engage temporary workers either directly, via an agency or other intermediary and where tax and NIC’s are taken at source, do not need to undertake IR35 determinations.
Is there a way for PSC contractors to avoid IR35 exposure?
In short, there is nothing that can be done to ‘avoid’ IR35 determinations being made on your engagements. Unless you are a small company per HMRC’s definition, from April 2020 it is the end client’s responsibility to carry out determinations on your engagements. If you are a small company, the responsibility of determination continues to reside with the contractor/PSC.
What will be the longer-term consequences of IR35?
Some companies may lose access to a huge swathe of talent that has traditionally represented an important component of their total extended workforce. This will impact on their mid to longer term planning and capability to execute. Some companies are already hiring more permanent staff, which will create further challenges and problems. In technology where there is a high churn and short business cycles– skills become irrelevant fast leaving the skills and expertise within the workforce no longer aligned to current and future needs. Businesses are craving agility and speed-to-market. They can be rendered less flexible by a more rigid workforce skills base and structure and this will provide opportunities for industry challengers and new entrants to disrupt.
How will employers change the way they engage contractors?
After a time, the dust will settle, and organisations will start exploring new compliant approaches. Companies will increasingly shift to an infrastructure where they can ‘procure services’ to deliver outcomes, rather than ‘hiring contractors’ to perform a role. Fixed price deliverables will become more common over the current ‘day rate’ that many contractors use today. The individual ‘service providers’ contracted to deliver theses outcomes will not be subject to the same traditional ‘supervision, direction & control’ relationship that many contractors currently work under.
What’s the immediate effect of IR35 going to be?
We’re already seeing big banks and other firms putting a blanket ban on personal service companies as a result of change in policy in response to the amended legislation. In these cases, contractors are being asked to either become a permanent member of staff or be engaged through an agency or umbrella provider on a PAYE basis (where the fee payer will make the deductions). For those contractors who believe they can operate legitimately on an outside IR35 basis, they may decide to leave their assignments and seek other opportunities.
What are the financial implications of IR35 for employers?
If you change previous PSC engagements to permanent headcount, you will need to consider the apprenticeship levy and employers’ NI. So that’s an additional 17-18% on staffing costs. Then you have bonuses, pensions, real estate costs and more on top. Longer term, more investment will have to go into training and L&D where technical or specialist knowledge workers can quickly become obsolete – contractors pay for their own learning and training of course.
Who is responsible for making the IR35 determination?
The end client (or work giver), at the top of the supply chain. It doesn’t matter how many intermediaries there are. They may ask intermediaries to help with the determination, but they are ultimately liable.
Is HMRC’s CEST tool accurate?
The common criticism of CEST is that it is too simplistic – it can’t consider the nuance of context. The important point is that HMRC (as of Nov 2019) is saying it will stand by CEST determinations. Therefore, they are ‘accurate’ in its eyes. We are expecting an update in the CEST tool before the law comes into effect – so it will be interesting to see what changes. Make sure you keep current with these expected changes.
What are the key criteria to fall outside IR35?
There is no one key criteria – and HMRC has not given a specified weighting to them. The issues of direction and control, mutuality of obligation and right of substitution are perhaps the most fundamental.
How can I determine IR35 status?
Please see the Russam Guide and the key criteria for making the determination. The CEST tool can be used of course but the key is to use “reasonable care” and work closely across all parties involved in terms of looking at the nature of the work and then make a determination.
Who is liable in the event of non-compliance?
Each party within the supply chain is required to demonstrate reasonable care has been undertaken in meeting their obligations regarding IR35 compliance. The ultimate responsibility by virtue of the transfer of debt liability is to the highest party within the supply chain, ie. the work giver or end client. All parties should be equally motivated to ensure compliance to its own and each other’s obligations.
What is the difference in take home pay?
Ultimately this relates to the different tax treatment of an individual relative to the applicable taxes paid under the two different engagement models. Payment of corporation tax that a PSC would pay (currently at 19%) is clearly lower than personal income tax (currently at 20, 40 and 45% subject to earnings) and NIC’s at 12% with an additional 2% on earnings above £46,350 pa).