Before reading this it is advised to have some understanding of IR35 Off-payrolling. Read our article here for the basics. The Q&As below are taken from an Institute of Chartered Accountants England & Wales (ICAEW) members’ webinar.
Q1: What are the implications for individuals not working via a personal service company (‘PSC’) but as a sole trader?
A1: the IR35 and off-payrolling rules apply only to individuals working through a PSC or other intermediary. Individuals who work as sole traders and contract directly with their client are outside IR35 and the off-payrolling rules. Where an individual works as a sole trader, it has always been necessary for the engager to consider the employment status of the individual and, if appropriate, to withhold and account for PAYE.
Q2: implementation of these rules in the public sector led to less use of PSCs and greater use of umbrellas & some on-payrolling. Does this mark the end of most PSCs?
A2: where the facts support a non-employee employment status determination then the new rules should not affect the status quo in a particular case. However, HMRC estimates that there is 90% non-compliance with IR35 by PSCs. Given the cost of employer NIC where the employment status determination is that the contractor would be an employee if not working via a PSC, there may well be changes in the private sector to how labour supply chains are organised. There has been recent press comment that certain organisations will no longer have PSCs in their supply chain.
Q3: Why would any contractor accept a contract that is deemed INSIDE IR35 (by the client) with a payment being made to their PSC? There is no point in having a PSC anymore. Would there not simply be a fixed-term EMPLOYMENT contract between client and worker?
A3: an employment contract would mean that the individual would have rights such as paid holidays, notice periods, etc, which are not available to deemed employees, and, as PAYE withholding applies to employment contacts and to deemed employments, then for a given fee, the take home pay is the same for both. However, employment rights impose costs on employers and some hirers perceive that a permanent workforce can reduce their ability quickly to adapt to changing business needs, so prefer not to enter into employment contracts but hire individuals via intermediary organisations. Adding workers to a payroll as employees will increase the client’s headcount for other purposes too, such as gender pay gap reporting.
Q4: Isn’t this going to be so complex that contractors will just put all contractors on normal payroll?
A4: clients may feel tempted to do this because, despite the potential increased financial cost, certainty is preferable to the potential risk of HMRC opening employment status inquiries and imposing backdated PAYE liabilities some years down the line. It is also not straightforward because PSC workers who are rehired as employees may be earning more than the equivalent employee salary band for the role, which may give rise to equal pay issues and necessitate renegotiation of pay rates for affected workers if employers want to reduce their daily rates on the grounds that these workers now have pension rights and holiday pay.
Q5: Who is a “contractor”? Any non-substitutable individual who is not on payroll? Can we, for example, assume that when we contract out cleaning, we’re not affected by the new rules because we don’t really care what individuals turn up to clean the office. They may have PSCs but that would be an issue for the cleaning company?
A5: assuming that in this example the cleaning company is providing a service of cleaning the offices rather than providing staff to clean the offices, then the cleaning company would appear to be the “client” under the new rules and so the buck will stop with the cleaning company; thus it will be up to the cleaning company (assuming that it is not “small”) inter alia to undertake employment status determinations in respect of their contractors whether or not they work via PSCs (and give them status determination statements if they do).The important point is whether the cleaning company is providing cleaning services and not just the labour of specific individuals.
Q6: I have a client who delivers projects to a large business. They do this by supplying the large business with subcontractors. Will my client have to do the determination or the large business?
A6: the answer to this question depends on the facts, including whether the staff that are provided are working through their own personal service companies. If your client is delivering projects by providing a service, like the cleaning company in the previous question, then your client will be in the same position as the aforementioned cleaning company. If your client is delivering projects by providing staff to the large business then the staff may be employees of your client under the agency rules. If your client is delivering projects by providing staff who work through their own personal service companies to the large business then the new rules may apply and the large business will be the “client” under the new rules and so obliged to determine employment status, supply SDS, etc.
Q7: If the contractor through a PSC is providing Director services to the client is there a presumption that IR35 applies? Could a Director’s fee through payroll cover this and the balance of fee still go through PSC avoiding IR35?
A7: we assume from the statement “the balance of the fee” that the individual has two roles: in one role they are acting as a director and in their other role they are providing the sort of services that any contractor might provide. If the director services are provided by the worker as an office holder1, any fees are employment earnings under s62 ITEPA 2003. The off-payrolling rules do not apply to office holders as their earnings are, or at least should be, subjected to PAYE under existing rules. The fees for the other role will be within the off-payrolling rules. If the client is not “small”, the client will need to determine the employment status and provide a Status Determination Statement (SDS), etc. If the client is “small” then the contractor must determine what their employment status would be if they were hired directly and not via their PSC and if appropriate perform the IR35 calculation within their PSC, just as it has been doing since April 2000.
Q8: If there is a company who offers a contractor a contract for services to undertake a project for a client for a fee, who is responsible for the IR35 tax in this case?
A8: if the company (known as the “client” in the legislation) who is offering a contract to a contractor who works through a PSC is “small” then the contractor will be responsible for determining their employment status and accounting if appropriate for IR35 tax through their PSC as the traditional IR35 rules will apply. However, whereas if the company offering the contract is not “small”, or is in the public sector, then the engagement will fall within the new off-payrolling rules and the company as client/engager will be responsible for determining employment status and providing an SDS etc.
INTERACTION WITH THE CONSTRUCTION INDUSTRY SCHEME (CIS)
Q9: How will this system interact with the existing Construction Industry Scheme (CIS) system ie, currently these subbies would be caught within this scheme and would have CIS tax deducted if they have net payment status?
A9: most labour-only subcontractors are not incorporated so CIS will still apply, but for those who work via a PSC the new off-payrolling rules trump CIS.
Q10: What is the definition of a client?
A10: the end user of the PSC’s services. Sometimes the terms “hirer” or “engager” are used.
Q11: We use employment agencies to supply us with accountants for year-end work. We pay the agencies on an invoice basis plus VAT based upon an hourly/daily rate. We understand that the agencies ’employ’ their contractors through PSCs. Can we carry on like this?
A11: no, unless you are ‘small’. If you are not small you will need to consider the status of the accountants and issue SDSs.
Q12: We have a number of labour agencies we use to provide labour on site as we are in the construction industry – will the labour agency be classified as a PSC?
A12: the agency worker regulations will apply to the sole traders subbies who will be under the CIS regime or if the contractor works through a PSC then the new off-payroll working rules will apply unless you as client are ‘small’.
THE SUBJECT OF ‘SMALL’ COMPANY
Q13: Is the size criteria related to the end client rather than fee payer?
A13: the size criteria relates only to the end client. The size of the other organisations in the labour supply chain, whether they be an agency, the fee-payer or the contractor’s PSC, is irrelevant.
Q14: Does the ‘small’ exemption apply to the client at the top of the chain rather than the PSC lower down?
A14: yes, the size criteria applies only to the client at the top of the chain.
Q15: Do you mean that small or micro companies are exempt from IR35 rules?
A15: yes, where a private sector end client is small (or micro) the new off-payrolling rules will not apply. Instead, as has been the case since 6 April 2000, the contactor’s PSC will remain liable for assessing whether the contractor is within IR35, ie would be an employee if hired direct rather than via the contactor’s PSC.
Q16: How do you notify HMRC that you are taking the small company exemption?
A16: whilst private sector clients will need to work out whether or not they are small, there is no statutory requirement on ‘small’ private sector clients to notify anyone in the labour supply chain or HMRC that they are ‘small’, nor to issue SDS. However, contractors or those with whom clients contract might ask clients to confirm whether or not the client is ‘small’ so they know where they stand, eg on pricing, payment, who has to determine employment status and if appropriate withhold and account for PAYE, and how to account for fees in their PSC.
Q17: How do the small company definitions work for a group of companies? Are those limits applied to a group or each individual company? If a group basis, is that just UK group companies or worldwide (and thus dragging in some small UK foreign owned companies)?
A17: the off-payrolling rules will require the entire worldwide group to be considered
Q18: Will it be acceptable for the fee payer/engager and not the client/end user to make the determination and issue the SDS? Thinking of scenario where contractor works with team from engager/fee payer on project services provided to engager’s client.
A18: under the off-payrolling rules the client should make the determination and issue the SDS as the (prospective) law says that unless and until the client provides an SDS to the contractor the client is liable for the tax and NIC that should have been withheld and the employer NIC that should have been paid if the contractor should have been viewed as a deemed employee.
However, if in the case envisaged by the questioner the team is contracted to provide a service rather than staff working through PSCs then it might be that the off-payrolling rules are not applicable (see questions above under General points).
Q19: The client is asking the intermediary agent to make the determination. Are they able to do this?
A19: the client can outsource this activity, and indeed agencies may have a better understanding of employment status law than many clients, but will an agency have sufficient knowledge of what is happening day-to-day in the workplace? An agency also may not know details about the contractor, eg how many other clients the contractor has, but this is a problem that clients undertaking employment status determinations face too. The client needs to bear in mind that contacting out does not absolve it of responsibility for complying with its legal obligations.
Q20: What should be included in an SDS where determination differs from CEST result?
A20: the (prospective) law provides that an employment status determination does not count as an SDS if the client fails to explain the reasons for or take reasonable care in coming to the conclusion mentioned in it. HMRC has said that it will stand by a CEST determination provided the facts input are truthful so if the question is considering a scenario where a CEST determination is going to be disputed we recommend marshalling evidence robust enough to stand up before a tribunal or in court.
HMRC’S CHECK EMPLOYMENT STATUS TOOL (CEST)
Q21: Do you have a view on whether CEST is an appropriate tool to use? There is lots of noise that this is inadequate.
A21: CEST is not perfect but as mentioned above, HMRC will stand by its determination provided the facts input by the user are truthful. We and other representative bodies have been helping HMRC to improve CEST.
Q22: Will CEST provide the reasons for the results that it provides?
A22: the improved CEST will provide reasons and HMRC has confirmed that the pdf that CEST produces which contains reasons will satisfy the requirement to explain the reasons for the conclusion in an SDS
WITHHOLDING PAYE UNDER THE OFF-PAYROLLING RULES
Q23: Will the deduction/withholding be for both PAYE and employees’ NIC?
A23: yes, and, in addition, the deemed employer needs to account to HMRC for employer’s NIC and, if applicable, apprenticeship levy.
Q24: How is employer NIC handled?
A24: employer NIC will be accounted for to HMRC by whoever is responsible for withholding PAYE from payments to deemed employees via a payroll. If the rules work as intended, this will be “the fee payer”, which is the organisation that directly pays contractors’ PSCs.
Q25: What is the view on whether employer’s NIC is deducted from the contractor payment?
A25: employer NIC should not be deducted from the payment to the PSC/contractor, unless the contract specifically allows this.
Q26: Regarding employer NIC, will we see a proliferation of contracts which will specify where any possible future NIC liability will lie?
A26: this is a possibility. However, unless there is an umbrella arrangement where the PSC agrees to bear the cost of employer NIC as well as the employee NIC and tax, we cannot say whether an indemnity in a particular contract to pass this cost down to the PSC would be effective. We certainly expect roles to be advertised as being within or outside IR35 and the contractual arrangements to reflect this.
Q27: In a typical supply chain the PSC contracts with an agency. If the SDS says that the assignment is within the rules (and this is not challenged) then would the agency deduct employer NIC from the worker’s payments, even though they are only a deemed employee?
A27: the agency that is acting as fee-payer will account to HMRC for employer NIC (and if applicable apprenticeship levy) on the fees payable to the PSC via payroll. Employer NIC (and apprenticeship levy) should not be deducted from the net amount paid to the PSC but should be charged back to the client – unless the agency agrees to bear this cost or the contract says that the PSC will bear the cost.
PERSONAL SERVICE COMPANY (PSC)
Q28: Could you define a Personal Service Company?
A28: the most common PSC is a company through which a contractor who is the sole director and shareholder of the PSC contracts with clients to provide the services of the contractor.