Off-Payroll Legislation

 

It is expected that the Off-Payroll legislation which currently exists within the Public Sector will be introduced into the Private Sector in April 2020.

BizTek offers its services to Private Sector clients to help prepare for this legislation now.

The term "Agency" is used throughout this document to define the recruitment company that has supply agreements with its clients to fulfil "contract roles". Technically (and legally) an "Agency" only provides permanent recruitment services. It is an "Employment Business" when providing contractor services. However, generally, people use the term "Agency" when referring to a recruitment company providing both permanent and contract supply services. For the purpose of this document the term "Agency" means Employment Business. 

Also, for the purposes of this document the "Contractor" is the worker who is employed by a limited company. This might be an Umbrella company, the contractor's own personal service company or a consultancy company with the ability to provide other workers.

The agency is therefore an intermediary company that sits in the contractual chain between the client and the contractor's limited company. The agency has a supply agreement in place with the client and a second agreement with the contractor's company.

What is Off-Payroll in simple terms?

In simple terms, Off-Payroll is legislation to change the way IR35 is policed and shifts liability from the contractor to the agency. This means that if the contractor is deemed to not have been paying enough tax, then HMRC can reclaim this tax from the agency. Under this new legislation it is therefore the agency's responsibility to assess if the client assignment requires either:

-        the services of a business consultancy where it's employee (worker/contractor) is assigned to complete the work on behalf of the consultancy and hence the worker will be outside IR35

-        or requires the personal hire of a named worker to work effectively as a temporary employee in terms of day to day task management, and hence the worker will sit inside IR35.

For those contractors supplied under a personal hire, then the agency must treat the payment it makes to the contractor's company as income for the contractor and must deduct income tax and national insurance and pay this to HMRC, as if the contractor was an employee of the agency.

If the liability rests with the Agency, then why should a Client be concerned?

The IR35 status of a contactor fulfilling a client assignment/role is largely determined by both the supplier terms in place between the client and the agency, and how the client engages the contractor during the assignment. Hence it is vital that the client is involved and has the correct supplier terms and process in place for either/both service scenarios. If the existing terms are not well defined with clear processes for engagement by the client, then the agency will be required to seek clarity and guidance from the client.

Equally clients must not have a blanket assessment and must treat each assignment/role on its own merit. The client might group a number of roles being covered by one assessment etc. This of course means that the client must have trained staff capable of performing assessments.

The client must inform the agency whether or not the assignment falls within the off-payroll rules and hence inside IR35. This conclusion can be included in the specific agreement terms or separately. Where the client fails to provide such notification, then the agency can request in writing that the information be made available, together with the reasons supporting their conclusion. Failure to respond to such a request within 31 days of receipt will result in the client becoming responsible for accounting for PAYE. It is critically important that clients recognise this duty of care. These assessments by clients, or in some cases blanket decisions, might have a serious impact on contractor availability, rates and can cause general contractor chaos amongst its agency PSL as has happened in the Public Sector. More on this below.

So, it vital that clients understand this legislation and review supplier terms to carry either or both the above supplier scenarios. Some clients, whose terms align with a personal hire scenario, might wish to understand and engage a more business consultancy project approach; which could provide major benefits within their business by maintaining maximum candidate availability and avoiding rate increases and/or preventing contractor unrest and disruption within the workforce.

 

First let us understand IR35.

IR35 was introduced many years ago and is a tax regime. 

HMRC believed that many contractors who operated via their own limited company, did so in order to gain a major tax advantage and that they were not truly in business. HMRC believed that contractors were hiring out their own personal self to work for a client (via an agency) on a temporary basis, performing work equivalent to client permanent employees. The contractor was working for the client, under the client's day to day control and supervision and being paid purely by the hours that they were on site at the client's office. That the contractor would be working alongside permanent employees and effectively their treatment by the client made them indistinguishable from permanent workers. In such cases where contractors were hired under such personal hire terms, HMRC deemed that the contractor was effectively a "disguised employee" of the client. HMRC suggested that this was further evidenced by the fact that the contractor was the sole employee of his/her company and hence was using their company as purely a remuneration vehicle. This was deemed as working "Inside IR35". The result of this was that the contractor must remunerate themselves under the same taxation model as the equivalent permanent employee.  Although the contractor can still be employed by its own company, they must be remunerated almost entirely via salary, just as they would be if employed directly by the client. The contractor was limited on company expenses (circa 5%) and not therefore allowed to remunerate via lower tax methods such as dividend payments.

However, some contractors were running their business as a true consultancy. They only accepted work via an agency that was a piece of project work. The contractor's company would be engaged under a statement of work that defined clearly the project deliverables. The worker of the business (the contractor) would not be under the direct day to day control of the client and would carry out the work at a time and place of their own choosing. The business delivering the work, would have the ability to substitute workers if required and there would be no obligation on the client to provide other work and neither would the business be under any obligation to accept any other work outside the scope of what was "signed off" in the agreement between them. In this case, the worker (contractor) was employed by a true consultancy that was engaged to provide project services and hence its workers were not "disguised employees" of the client. Therefore, the worker/contractor was deemed as "Outside IR35". The worker was therefore under no limitations of how they could be remunerated.

The issue with IR35 was that it was the contractor's (worker's) responsibility to decide if they were inside or outside of IR35. The clients and the agencies had never had to worry about IR35. Supplier agreements were never, in the vast majority of cases, very clear in terms of defining personal or business services. The fact that it was HMRC's responsibility to police IR35 and that they had few inspectors verses the millions of contractors, meant that contractors largely ignored IR35. They continued to pay themselves as if they operated outside IR35 irrespective of the terms in force.

So HMRC introduced Off-Payroll legislation which moved the burden of liability from the contractor onto the agency. It became the agency's responsibility to decide if a contractor was working inside or outside IR35 and the agency became liable for any unpaid tax, if later an investigation of a contractor working outside IR35 was deemed to actually be inside IR35.

HMRC introduced Off-Payroll into the Public sector in 2017. It now plans to roll this into the Private sector in April 2020.

 

What happened when Off-Payroll was introduced into the Public sector?

In one word - Chaos.

Firstly, clients took the stance that this did not affect them. But of course, it did because in defining the IR35 status of a contractor, the actual terms and operational engagement of the contractor in how the work is performed did affect the client. Clients often dictate the terms with their agencies under which they engage contractors. It is these terms that largely are the determining factor in the agency making its assessment.

Of course, HMRC in investigating and determining the IR35 status will look beyond the agreements in place and will often look at how these terms are being enforced in the working environment. Any investigation will impact the client with site visits etc.

Historically, the majority of terms between the clients and their agencies have been built without any need of reference to IR35 and hence have generally been inconclusive and in fact often were a mix of the two types of engagement. IR35 assessments are therefore difficult without client input. Clients decided that it might be easier to either avoid giving a view or to take a safer view of "inside IR35". At the end of the day, clients thought that it wouldn't really affect them and hence why get involved? Also, if they gave a view of inside IR35 then there would be no IR35 investigations and hence no involvement for them in HMRC investigations.

So initially all agencies informed all contractors that they must operate inside IR35.   

Hence contractors looked at the result of having to pay higher taxes, and they either refused further contracts inside the public sector or they demanded a reported 20% rate increase to cover the increased tax position.

Further, some agencies saw a sales opportunity. Some, who thought the risk of an HMRC investigation was small, were prepared to allow contractors to work outside IR35. After all it was the agencies liability. It has been reported in the medical sector that some agencies created many companies, with the plan that if one batch of client contractors were investigated, they would close the company and transfer the contractors to one of their other companies to avoid the tax and penalties. Of course, these agencies caused chaos within the client's overall contractor base because those contractors employed Inside IR35 demanded that their client authorise a transfer to the agency allowing them to work outside IR35.

The conclusion here is that Off-Payroll DOES AFFECT CLIENTS and hence they MUST be involved in setting clear guidelines and direction and implementing a level playing field for all their PSL.

 

What do Private Sector Clients need to learn and do now?

Simply that Off-Payroll tax legislation does affect them and they need to get involved and prepared well ahead of the legislation being introduced.

Clients MUST decide if they are going to engage personal hire contractors and/or consultancy business service contractors and should review their terms and procedures and amend if necessary.

If they engage personal hire contractors and engage any directly, then they must put process in place to deduct tax and national insurance from payments made, or introduce an agency into the supply chain to pass liability from themselves to the agency.

Those clients not using a business service model MUST understand what this means and decide if they wish to introduce such a supply model. If so, they must introduce supplier terms and educate management of how to engage such contractors. Clients do need to consider the cost and talent availability benefits of such a model, or simply to face up to the rate increases and lack of availability if purely maintaining personal hire contractors.

In most clients, it is likely that different areas of their business may require either of the two models of engagement and hence clients should put agency terms in place that cover both models and also have clear policy to help manage and assist agencies in the type of model being employed.  Clients using a business service model must make sure that the correct procedures are put in place within the project to enforce the supplier terms and not allow hiring managers to engage a business service but actually then manage the contractors in a way aligned to a personal hire.

In most cases the client will need to educate staff who will provide assessments and advise the agency if off-payroll applies. Equally clients should also put audit procedures in place for contractors working outside Off-payroll and Outside IR35 in order to provide evidence (deliverable signoffs etc) in case of HMRC investigations.

Further we would suggest that clients look very carefully at the agencies they employ, to make sure that they are fully compliant with legislation. Clients should audit the terms that the agency presents to the contractor's business. Do the agencies enforce ITEPA compliance and are they registered as an intermediary with HMRC making the required quarterly reports providing the worker/contractor details to HMRC. For personal hire contractors are the agencies correctly registering the worker on their own payroll and paying the correct taxes.

Clients must Implement new processes and insist that the agencies make risk assessments using experts. See below.

  

How can BizTek Help?

BizTek is created and owned by a mix of IT people, pure recruitment specialists and people very experienced at legislative compliance. BizTek's current directors have worked at the forefront of legislative change in the recruitment industry since 1994.

BizTek can advise on changes required to allow contractors to work outside IR35.  For some clients, these changes can be small. For others there is a seismic shift if their engagement model, but the benefits of greater contractor availability and lower rates should be considered a major benefit.

BizTek can assist in the creation of new terms and assist in arrangement of assessments of working contractors to give comfort to the agency and client.  This is a really important fact that clients should take note of.  BizTek is aligned with experts who carry out contractor assessments re IR35 status. Our independent experts will review all agreements between the three parties and will video interview the contractor. They have a much more relevant and detailed IR35 status assessment tool to test out the contractor.  This will provide a level of assurance to all parties that the correct process is in place.

 

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