UK: Reform Of IR35 For Private Sector Assignments – Start Preparing Now

Last Updated: 23 July 2018
Article by Bridget Wood

The government is currently consulting on "the best way to tackle non-compliance with the off-payroll working rules (IR35) in the private sector".  It seems likely that new IR35 legislation, similar to that introduced for the public sector in 2017, will come into effect from April next year.  Staffing companies that supply into the private sector should consider responding to the consultation, which closes on 10 August 2018, and start planning ahead for next April.

Background

On 6 April 2017, responsibility for assessing IR35 tax status transferred from personal service company ("PSC") contractors (and other intermediaries such as partnerships and sole traders) to staffing companies that place PSC contractors on public sector assignments.  Under these rules, if the individual contractor who works on the assignment would be regarded as an employee of the public authority client for tax purposes if that client engaged the individual contractor directly, the assignment is within IR35.  The staffing company is then responsible for deducting and paying deemed employment income tax and employee's National Insurance contributions ("NICs") from the fees it pays for the PSC contractor's services and for paying employer's NICs.  The staffing company is also treated as the employer for employment allowance purposes.  Payments the staffing company makes to PSC contractors within IR35 count towards the staffing company's pay bill for the purposes of the apprenticeship levy, which it has to pay if its annual pay bill is more than £3 million.

Public authority end user clients have a duty to inform staffing companies that supply the services of PSC contractors to them whether they would regard the individual contractor as their employee if they engaged the individual directly.  They are required to take reasonable care in coming to their conclusion on employment status.  If a public authority fails to inform a staffing company of its conclusion on a contractor's status or fails to take reasonable care in coming to its conclusion, there is a risk that any liability to pay tax and NICs transfers from the staffing company to the public authority.

Now the government wants to roll out the public sector IR35 rules to the private sector.

The consultation

The consultation document makes a number of suggestions for the reform of the IR35 rules for off-payroll working in the private sector.  These are:

  • Extending the public sector reform to the private sector.
  • Encouraging, or requiring, businesses to help ensure that off-payroll workers provided to them through their labour supply chains are complying with the existing private sector off-payroll working rules.
  • Maintaining the existing private sector off-payroll working rules and placing additional record keeping obligations on end user clients.

It also asks for suggestions for other options to tackle non-compliance with the private sector IR35 rules, although it excludes several suggestions made in response to previous consultations on the off-payroll working rules.

However, it is clear that the favoured option is to introduce new rules similar to the public sector rules.  The consultation document cites this as "the lead option".  If the government goes ahead with this option, it could possibly be with some additional more stringent requirements including:

  • Sanctions imposed on staffing companies which disregard an end user client's conclusion that a contractor is a deemed employee and decide that a contractor is outside IR35.  This suggested "improvement" should be strongly resisted by staffing companies which should, as the tax payers, seek to retain control over how they assess their own tax liabilities.
  • Penalties imposed on contractors or PSCs who knowingly receive income from which the correct amount of tax and NICs has not been deducted.

What should staffing companies do now?

Staffing companies should consider responding to the consultation or contributing to a trade association's response before the 10 August 2018 deadline.  It is important that the staffing industry's views are heard.  Although it seems that a decision on the way forward has probably already been made, there is still an opportunity to influence the outcome.

If the public sector off-payroll working rules are implemented in the private sector, staffing companies with public and private sector clients will have an advantage over those that only have private sector clients.  However, staffing companies that only supply into the private sector can learn from their experiences and those of their advisers and start planning ahead.

Staffing companies which supply into the private sector and have no or limited experience of the public sector off-payroll rules should consider actioning the following:

  • Assigning a team to educate themselves and the business on the new rules and take responsibility for planning for the implementation of the new rules.
  • Working with clients and contractors to educate them on the new rules before they come into force, making sure that they are aware of their obligations and ensuring in particular that clients understand that the legislation will not permit them to take a blanket approach to assessing status and simply decide to treat all contractors as being within IR35.
  • Working with clients and contractors to make a full assessment of their contractor base and consider how to engage contractors going forward.
  • Reviewing existing client and contractor contracts and varying them where necessary or entering into new ones.
  • Anticipating the introduction of the new rules when tendering for new client contracts and factoring this in when negotiating and entering into new contracts.

When planning ahead, it is worth noting that the introduction of the public sector off-payroll working rules prompted the following:

  • Rate increases for business-critical contractors and lower fees or termination of assignments for others.
  • The engagement of contractors directly as PAYE workers.  This model of engagement brings with it increased compliance burdens in relation to social security benefits and certain employment law protection rights, such as the entitlement to paid holiday and the 48 hour weekly working time limit.
  • The engagement of contractors via umbrella companies which take them on as employees.  Staffing companies supplying into the public sector significantly favoured this option over continuing to directly engage PSCs they assessed as being within IR35 or directly engaging contractors as PAYE workers.  It is important that staffing companies only engage with accredited umbrella companies and avoid those with contractor offerings that sound too good to be true.  Staffing companies face increasing risk exposure in this area, including under the Criminal Finances Act which last September introduced two new offences of failure to prevent the facilitation of tax evasion offences.
  • "Margin only" contracts under which the end user client engages and pays the PSC directly and pays the staffing company its margin only. This moves IR35 liability to the end user client. It also makes the Agency Workers Regulations an irrelevant consideration because the "margin only" model takes PSCs completely out of scope. The downside to this model is that the staffing company potentially loses ownership of contractors. However, appropriately drafted restrictions in client contracts and, where the Conduct Regulations do not apply, in contractors' contracts can prevent this.
  • Contracts for the full outsourced service rather than the provision of workers' services.  This means that the public sector IR35 rules do not apply.  Some staffing companies have built in-house expertise in the skills of the contractors whose services they supply and are able to contract with clients to provide these services.  This has added burdens, such as increased liability exposure and insurance costs, but these should not be insurmountable.
  • Project-based contracts. Historically, contractors and clients have been reluctant to enter into project-based contracts rather than time and materials consultancy contracts. However, contracting on a project basis, with fixed prices for the provision of pre-defined deliverables and, for example, success fees for achieving milestones and project credits for failing to meet key performance indicators, is outside the scope of the public sector IR35 rules.
  • Assignments that allow substitution of the contractor with substitution occurring in practice.

If the public sector off-payroll working rules are introduced for the private sector, staffing companies that embrace the challenges and continue to engage and supply the services of PSC contractors will need to work with clients and contractors to assess IR35 status.  They will need to decide how to do this.  Options include:

  • Making their own status assessments, possibly with guidance from advisers.
  • Using HMRC's online CEST (check employment status for tax) tool.  This tool has crucial deficiencies, including not testing for the key employment indicator of mutuality of obligation (the obligation on an employer to provide work and the obligation on an individual to accept that work), and is not suitable for assignments in some sectors.
  • Outsourcing the IR35 status assessment to a third party provider, some of which provide an insurance-backed offering.  These, however, must be scrutinised beyond the sales pitch to ensure that the written contracts properly reflect the offering.

Key to any reaction to this consultation and its likely outcome will be the ability of staffing companies to educate and work with their clients and contractors.  Making sure that clients and contractors understand the off-payroll working rules and are not unsettled will be a valuable investment of time which should help smooth the process of transition and retain client and contractor loyalty.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Mishcon de Reya
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Mishcon de Reya
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions