Freshminds hosted a panel session to give clients and contractors expert views on the forthcoming changes to legislation governing the engagement of "off-payroll" workers and contractors.
We were joined by Oliver Weiss, Partner at Blake Morgan LLP, Catherine Hearn, Director of Resourcing & Talent at BBC, and Rob Woodward, Associate Director Employment Tax at BDO UK LLP.
Summarising the proposed changes, Oliver Weiss explained that the only difference was that it now becomes the hiring entity (or client) who is responsible for determining the employment status of the assignment, rather than the self-employed contractor or Personal Service Company (PSC). This place a duty of care on clients to ensure that the work they commission is correctly treated for tax purposes, with appropriate income tax and PAYE deductions being made at source. Liability for correct tax deductions in line with the status determinationrests with whoever is paying the worker (either the client or agency if not engaged directly).
Having already come into effect across the public sector in 2017, the challenges and controversy over these changes have been well documented, and many clients and contractors fear a significant impact to the way that they work.
Supporters of the planned changes point to potentially unfair tax advantages enjoyed by PSC contractors who really should be regarded as employees, while critics consider the changes as a curtailment on the activities of the genuinely self-employed. In recent weeks increasing criticism has been levied at HMRC for potentially creating “zero rights” employment status for millions of people, who will be regarded as employees only for tax, but share in few, if any, of the usual benefits associated with formal employment.
The panel of experts was quick to agree that open, transparent and constructive communication was vital in ensuring that accurate status determinations supported contract work.
Evidence shows that hiring entities broadly fall into three distinct groups: those that have little or no awareness of the planned changes, those who have resolved at the outset to issue a blanket "inside IR35" status determinations, and those who take a considered and personal view of each decision. The latter group were by far the best placed to ensure that they were prepared come April 6th.
Catharine Hearn explained that trying to take shortcuts or resorting to “blanket determinations” risked undermining trust and relationships with contractors that could make a long time to rebuild. Instead, she urged clients to be pragmatic and open– remembering always that there was a human at the end of each decision, whose work and livelihood was in consideration.
Making an accurate employment status determination:
Rob Woodward noted that for decades lawyers, policymakers, businesses, and contractors have grappled with how to accurately and consistently define the employment status of a worker. The reality is that there are considerable ambiguity and nuance, making it essential to. The following steps were suggested to help hiring managers make appropriate determinations:
- Consider using the HMRC Check Employment Status Tool (CEST). Far from perfect - and much maligned in the press in recent months - this tool does at least structure a set of questions to help guide clients towards a reasonable determination.
- There is no legal obligation to use CEST, and many alternative tools and services have been developed by employment advisory and legal professionals. Clients must be able to demonstrate that they have exercised “due care” in reaching a status determination.
- Consider the critical determining factors carefully. These are simplified in the table below:
- Engage in dialogue with the contractor or agency early in the process. There may be budget implications of engaging "inside" or "outside" IR35, and this may influence how you want to frame the project.
- Avoid surprises. Make sure that everyone knows and agrees with the status of an assignment well in advance of an assignment commencing.
- Document your decision and any supporting evidence or tools that helped you get there. This will aid future status determinations and ensure that all parties have clarity should a determination be challenged later.
If you determine work to fall "outside" IR35:
Many of the strategic projects we support clients on have already been determined by clients to fall outside of IR35. In these instances, clients are free to continue to engage contractors on a PSC - limited company - basis. There will be no change to any of these engagements.
If you determine work to fall "inside" IR35:
Where you determine that the practice constitutes temporary employment, any contractor will need to be engaged on a PAYE basis. As a client, this means that you will incur the additional costs of Employers National Insurance contributions and holiday pay for that worker.
Contractors may also seek to renegotiate their rate if they are engaged on a PAYE basis.