In many ways it feels a long time since this time last year, however, from an IR35 perspective, its Groundhog Day as the private sector, once more, gears up for significant changes to the off-payroll regime which will come into force on 6 April.
In case you missed it first time around amid the focus on the general election (was that only a year ago?) and Brexit (plus ça change), IR35 is shorthand for legislation aimed at tackling ‘disguised employment’ where an individual worker provides services to an end client through an intermediary such as a personal service company (PSC). As things stand in the private sector, where IR35 applies the intermediary is obliged to pay income tax and National Insurance contributions on the sums earned by the worker as if he or she was employed by the end client. The responsibility for assessing whether IR35 applies rests with the intermediary though, and the treasury suspects that many intermediaries (nine out of ten PSCs according to a 2016 estimate) are not carrying out this assessment or paying tax and NICs.
Mirroring changes which were introduced in the public sector in 2017, from April 2021 for private sector businesses (other than small businesses – see below) the responsibility for assessing whether IR35 applies and, if it does, making deductions for tax and NICs, will shift up the contractual chain. The end client, highest in the chain, will be responsible for undertaking the assessment and producing a Status Determination Statement (SDS) to be passed down the chain. It will also be the fee-payer and therefore responsible for operating PAYE, if IR35 applies, where there is no intervening intermediary (such as an agency) between it and the PSC, although where one or more intervening intermediaries exists, the one closest to the PSC will be the fee-payer.
So how is this relevant to employment law?
Well, assessing whether IR35 applies is not the most straightforward exercise and involves applying various tests, derived from case law over many years, to the facts of each relevant engagement. Although employment status has been the focus of some high-profile judgments in the last few years (cases involving Uber and Pimlico Plumbers come to mind), many of the recent cases primarily considered the distinction between self-employed contractors and ‘workers’ – an employment law concept – which is less pertinent for IR35 where the issue is whether an individual is employed or self-employed for tax purposes. In fact, a 1968 case, Ready-Mixed Concrete (South East) v Minister of Pensions and National Insurance, is as relevant as any for determining whether there is a contract of employment.
The legislation dictates that end clients must take ‘reasonable care’ when making status determinations under the forthcoming changes. Help is on hand in the form of the government’s Check Employment Status for Tax (CEST) tool, however, it is not infallible and, arguably, fails to give adequate weighting to ‘mutuality of obligation’ which, together with personal service and control, and other provisions being consistent with a contract of employment, is an essential requirement for employment. There is also a risk that repeat users might be encouraged to answer its questions purposively or concentrate exclusively on the written terms of the contract. If recent decisions have taught us anything, it is that determining status is not a mechanical exercise and must involve analysis of the reality of the relationship, in other words how thing work in practice.
HMRC’s guidance indicates that taking reasonable care will involve using the CEST tool, however, it also advocates seeking the advice of a qualified, professional advisor. Failing to take reasonable care not only risks getting determinations wrong but also creating disputes (the SDS dispute process envisages a 45-day appeal period), undermining working relations and incurring unpaid tax claims (plus liability for interest and penalties) further down the line. Although HMRC may take a light touch to compliance initially, increasing fiscal pressure could lead to a re-evaluation of that approach.
Contractual arrangements with individuals working through intermediaries may need to change depending on their status determination or if the process reveals a contract which no longer reflects the reality of the relationship. An individual for whom IR35 applies may ask to become an employee if they are going to be paid as an employee, in which case they will need a written statement of particulars of employment (now a legal requirement from day one) while stringent conditions on what other work they may undertake has the potential to cause problems, particularly if they work for several clients through a PSC. Status determinations will also need to be kept under review and updated where the nature of an engagement changes.
There is an exception to the new rules for small businesses – companies in their first year and those businesses with two from i) 50 or fewer employees, ii) annual turnover of no more than £10.2m, and iii) a balance sheet total of no more that £5.1m. However, this does not mean than IR35 can be ignored, only that the responsibility remains with the intermediary which may find itself in trouble for not determining status or operating PAYE.
Although there is a lot to do ahead of April. Whether you are an end client or an individual working through an intermediary, or a party somewhere in the contractual chain, we are up and running having advised clients on IR35 prior to the postponement of the changes earlier this year. If you require advice on a determining status or preparing a SDS, or challenging a determination as a contractor, please contact myself or one of my colleagues in the Employment Team at Jacksons Law Firm.
Paul Clark, Partner and Head of Employment.
T: 01642 356500/0191 2322574
