From April 2020, the reforms to IR35 (the rules governing off-payroll working through an intermediary) that were introduced for the public sector in April 2019 will be extended to large and medium sized businesses in the private sector.
This will be relevant in all situations where contractors supply services to a business through a specific type of intermediary - for example, a personal services company (PSC) - whether intermediaries are engaged directly, through an agency or via a chain of agencies.
A policy paper and consultation document was published on 5 March 2019, which closes for comment on 28 May 2019.
What the legislation could mean for you
If we assume that the new legislation is going to broadly match the provisions for the public sector (as possibly updated by the consultation) then the following key points will apply.
Assessing and communicating in relation to the deemed employment condition
As a medium or large business, you will need to assess whether or not the "deemed employment condition" is met in relation to the contractor. This means assessing whether, but for the existence of the intermediary, an employment relationship (for tax purposes) exists between the contractor and the client.
Three key requirements relate to this assessment, which brings its own risk issues in terms of timing:
- You must give the outcome of your assessment to specific parties in the labour supply chain, this includes the party with whom you contract (e.g. an agency, the contractor PSC) and, subject to the outcome of the consultation, the worker, at the time the contract is entered into.
- If any questions are raised in relation to the assessment then the business must respond within 31 days.
- The business must also take "reasonable care" in determining whether the deemed employment condition is met.
The consultation also anticipates that the Government will legislate to require that information flows down the labour supply chain to the ultimate fee-payer to ensure that they have the information they need to comply with the rules.
However, they are also looking at the ability to short circuit this requirement where there are lengthy labour supply chains so that you must give the outcome of your assessment directly to the fee-payer.
Finally, the consultation also considers that as well as the requirement to provide a determination, it may be necessary for a process to be put in place to allow for determinations to be challenged. From the consultation it appears that the Government believes the most effective approach would be for clients to develop and implement a process to resolve disagreements based on a set of requirements set out in legislation.
Accounting for tax – potential costs
If a business engages directly with an intermediary and all of the conditions of the legislation apply then the business will be obliged to account for income tax and national insurance (both employee and employer) on any payments made to the intermediary.
The employer national insurance may represent a significant cost for the business, particularly where contractors receive significant fees.
Where the business doesn't engage with the intermediary directly and all of the conditions of the legislation apply, the liability to account for tax will be on the party that actually makes the payment to the intermediary (for example an agency). However, the Government is consulting on where the ultimate liability to account for tax should rest where a labour supplier / fee-payer does not comply with its obligations, with some suggestion that this could be on the client in certain circumstances.
The liability to account for tax can switch back to the business in three situations:
- Where the assessment of the employment condition was not given in the required timeframes;
- Where the business did not respond to a request for information in relation to the assessment within the required timeframes; or
- Where the business did not take "reasonable care" in determining whether the deemed employment condition was met.
What should you be doing now?
We anticipate that some businesses will already have started preparing for the changes next year by starting an audit of their current contingent labour population (including where contractors are supplied through agencies or other third parties).
For those that have not, an audit of your current labour population is the first and most vital step.
Following an audit there are certain other steps to take, both internally and externally, including:
- Identifying alternative models of contingent labour supply and analysing the possible costs of these different models;
- Assessing possible risk areas in relation to a shortage of labour or expertise and contractors with key strategic importance;
- Reviewing supplier and contractor contracts to ensure they are fit for purpose in time for the new rules;
- Ensuring that processes are in place and implemented to ensure that the business complies with its obligations under the legislation and within the required timeframes.
How can we help?
We can help you prepare for the new rules with training on IR35 and employment status. We are also working with clients to help identify risk areas and review consultancy and agency agreements to ensure that they are protected. Please contact me if you’d like to know more.
Would you like to learn more?
We’re holding a series of seminars in our Bristol, London and Manchester offices in May to give more guidance on IR35, explain the key provisions of the legislation, including how to assess the employment condition, and how to manage risk in relation to your contractor arrangements.