IR35 reforms 2020: 16 questions and the answers from industry experts
14 February 2020
Radius Law, LexisNexis, and Douglas Scott, have recently held two successful IR35 thought-leadership events in London and Manchester, with industry expertise from Haines Watts and EIC Insurance Services.
We have collated all of the questions asked by the attendees, and asked our panel of experts including Sandra Martins, and Andrew Hubbard, to provide us with the answers.
Read below to understand how the ‘worker’ is defined, what the Client’s responsibilities are, key terminology, the Government legislation and more.
You may also want to see our IR35 overview: IR35 reforms 2020: What is changing and how can you reduce the risks?
1. Who is who? – There seems to be a lot of confusion around the terminology used.
For the new IR35 rules to apply in the private sector, there must be a worker, who personally provides services to a client through an intermediary. The main characters, therefore are:
The worker: the individual providing the services;
An intermediary, which can be one of the following:
The client is the entity to whom the services are provided and is not a small business. This means the client will be either a non-corporate entity with an annual turnover of more than £10.2m or a corporate entity that satisfies at least two of the following:
If a parent company satisfies the conditions above, then all companies in the group will fall within IR35.
But that is not all! There are other important characters, including:
Deemed employer: the person who is treated as making the payment to the worker and who is responsible for deducting and paying the tax, NICs and apprenticeship levy.
Fee payer: the person immediately above the intermediary. In most cases, the fee payer is the person that pays the intermediary and will be the deemed employer.
The client will be the fee payer/deemed employer if it contracts directly with the intermediary.
Typically, the worker will have set up a personal services company (PSC) and provides services to clients via the PSC. Sometimes, an employment agency will contract with the worker’s PSC and place the worker with the client. There may be several entities in the labour supply chain: the client will be at the top of the chain and the intermediary at the bottom.
There must be an intermediary. IR35 will not apply to sole traders. It will also not apply where a worker is supplied to a client:
by an employment agency or umbrella company, where the worker is treated as an employee of the agency; or
by a managed services company (MSC) that operates PAYE on payments to workers.
Specific tax rules apply in these circumstances and the agency/MSC is responsible for paying the tax and NICs on the worker’s pay. Please note that if the MSC is the worker’s PSC, IR35 rules will apply.
The answers to these FAQs assume that there is an intermediary in each scenario.
2. I have heard that the Government is reviewing the legislation, which is still in draft form. Will it come into force on 6 April 2020?
Although the Government is reviewing the legislation it is anticipated that it will come into force on 6 April 2020. This is likely to be confirmed when the budget is announced. If you are likely to fall within the new rules, you should continue to prepare.
3. What are the client’s responsibilities?
For each contract with an intermediary, the client must decide whether or not the worker would be an employee of theirs had the client contracted directly with the worker. The client must take reasonable care when making that decision. They must also:
Document the decision in a status determination statement (SDS), which confirms whether or not IR35 applies, with reasons;
Give the SDS and reasons to the worker and the organisation with which they contract;
Keep detailed records of all SDS and reasons;
Set up a status disagreement process that allows the worker and the deemed employer to challenge the SDS;
If there is a challenge, complete the disagreement process and confirm the outcome within 45 days;
Inform the worker and the deemed employer (if any) if they become a small client.
If the client engages directly with the intermediary (there is no one else in the labour chain), it will also be the deemed employer/fee earner. This means they will have to deduct and pay tax and NICs on the worker’s deemed earnings.
Please note that an office holder of the client or of any entity associated with the client, who provides services to the client via an intermediary will be deemed to be an employee and fall within IR35.
HMRC will expect clients to check whom they contract with to ensure others in the supply chain are credible and legitimate.
4. Are there any obligations on the worker?
The worker must inform the client that it provides services to the client via an intermediary. The client must then decide on the worker’s status and pass the SDS to the worker (and the entity with which the client contracts).
The worker is also required to provide sufficient information to the client to enable it to carry out the SDS. They must not pass fraudulent information to the client. Doing so, will render the worker liable for tax and NICs.
5. Are there obligations on employment agencies?
Pass on the SDS to the next person in the chain, if there are other persons between the agency and the intermediary;
Deduct and pay tax, NICs and apprenticeship levy (where applicable) if they are the fee payer/deemed employer.
The agency will be the fee payer/deemed employer if it is based in the UK, contracts directly with the intermediary and is not controlled by the worker.
HMRC will expect agencies to check whom they contract with to ensure others in the supply chain are credible and legitimate.
6. What about the other parties in the labour supply chain?
Each party in the labour supply chain must pass the SDS to the next entity in the chain, until it reaches the person in the chain directly above the intermediary.
7. What happens if a party in the labour supply chain fails to pass on the SDS?
They become the fee payer/deemed employer (and liable to pay tax, NICs and apprenticeship levy) until they have complied with their obligations.
8. When deciding the worker’s status, will there be considerations for exceptions? For example, a fashion retailer will always ask an agency to supply a particular model and the model cannot send a substitute.
To avoid liability for paying tax and NICs, clients will have to take reasonable care when determining the worker’s status. Clients will be expected to follow HMRC’s guidance on determining status. One of the factors to consider is whether the worker has the right to send a substitute in their place, which indicates the worker is more likely to be self-employed. If there is no right to provide a substitute, the worker is more likely to be an employee, but substitution is less important in highly skilled jobs and where a client needs a particular expert or individual to perform the services. Clients can also use the HMRC Check Employment Status for Tax tool (CEST), however this tool places significant weight on substitution.
The client will have to consider all other factors. The following factors would normally indicate self-employment: the client has little control over the model; the model is in business on their own account, is free to work for others and does so; it is a short engagement, which ends automatically; the model is paid a fixed price for the engagement and/or bears costs if it overruns.
If the client would rather not fall under the IR35 rules, they may want to consider offering a casual worker contract, however the model is unlikely to agree. The client would have to pay tax and NICs on the model’s earnings under a casual worker’s contract.
9. When an employment agency places the worker with a client, who is responsible for deciding the worker’s status?
The client is always responsible for determining whether the worker would be an employee of theirs had the client contracted directly with the worker.
Failure to do so will result in the client becoming the fee payer/deemed employer and having to deduct and pay tax and NICs on the worker’s deemed earnings.
10. If a client doesn’t pass the SDS across by 6 April to an employment agency – does the agency continue to pay the intermediary gross sums?
The first question to ask is when the work was done. If this was all before 6 April 2020 then the new rules do not apply, even if payment is made on or after 6 April and payment can still be made gross. If the work was done on or after 6 April then the new rules will apply and the SDS will need to passed to the agency. If the services are provided both before and after 6 April the client will need to make a SDS in respect of the services provided on or after 6 April but only the payment which relates to the services provided on or after 6 April will be subject to the new rules. HMRC’s draft Employment Status Manual at ESM10001A permits a just and reasonable apportionment of any payment to be made when determining how much should be subject to PAYE.
As stated above, if the client fails to pass the SDS on or before payment is made, the client (and not the agency) will be responsible for deducting and paying the tax and NICs due.
11. If the worker is paid by an employment agency, how much responsibility does the client have over the worker’s tax once the new legislation comes in?
If the employment agency is based in the UK and contracts directly with the intermediary, the agency will normally be the fee payer/deemed employer and responsible for deducting and paying tax and NICs to HMRC. This assumes that the client and others higher up in the labour chain have complied with their obligations: that is, the client passed the SDS to the worker and the agency has received the SDS from the entity immediately above them in the supply chain.
The client may become liable if the employment agency fails to make the necessary payments and HMRC considers that there is no realistic prospect of recovering the payments from the agency in a reasonable period of time.
The Government has recently published draft regulations (for consultation) on when HMRC will recover unpaid income tax and NICs from the client or the first agency in the chain. HMRC has also updated its Employment Status Manual (still in draft), which gives guidance on how the new rules will apply, including when it will seek to recover unpaid tax and NICs.
You can find the draft regulations and draft Employment Status Manual here:
12. Do employment agencies have a responsibility to prompt clients to provide SDS by April 6?
No, but it may be wise to inform clients which workers are supplied to them via intermediaries and keep a record of having done so.
13. What happens to a contractor once the client decides they are an employee for IR35 purposes? Will the client have to offer employment rights?
The client will have to pass the SDS to the contractor and the entity with which the client contracts.
Deciding that a worker/contractor is an employee for IR35 purposes does not mean he/she will acquire employment rights. It just means that tax, NICs (and apprenticeship levy, if applicable) must be paid on the earnings the contractor receives through providing services to the client.
The worker will not suddenly be entitled to the same pay and benefits as the client gives to its employees. However, employment tribunals will take into account similar factors to HMRC/tax tribunals when deciding if a contractor is an employee and entitled to employment rights. If the contractor has been engaged by the same client for a while, the client exercises significant control over the work, how and when it is done, the worker is not allowed to provide a substitute or to work for other clients whilst engaged by the client, is paid a regular fee and suffers no financial risk, it is likely that he/she has already acquired employment rights. Further, a contractor who is deemed an employee under IR35 may be tempted to claim he/she is also an employee for the purposes of employment rights.
Care should be taken not to integrate the contractor into the client’s organisation. Doing so increases the risk of the contractor acquiring employment rights too.
14. Can the client put in the contract with the intermediary that there must be an employment contract with the worker?
Yes, they can and they should consider amending the contract to reduce the likelihood of IR35 applying. Ultimately, it will depend on each party’s bargaining power.
15. Does IR35 apply if the client is outside the UK?
IR35 only applies where the worker would be subject to UK tax or NICs on their earnings. This will depend on where the worker is resident and where the work is done. A worker resident in the UK is liable to tax wherever in the world the earnings arise. This means that IR35 may apply where a client based abroad engages a UK resident worker, even if that worker provides the services abroad.
Clients based abroad and parties who contract with non-UK clients or agencies should seek specialist tax advice on whether UK tax or NICs may be chargeable on the worker’s earnings.
16. Should the in-house legal team be involved in the SDS process?
HMRC has now confirmed that the persons involved in the SDS process should have a good understanding of the work to be done and be given proper support and training on the IR35 rules.
If a client outsources the SDS process, HMRC will expect the client to double-check the process and the determination themselves. If there are material changes to the worker’s terms and conditions or working practices, HMRC will expect the client to carry out a new SDS.
Failure to do this may mean that the client did not take reasonable care when making the SDS and will be liable for tax and NICs due.
Compliance with IR35 will involve a collaboration between several departments, including HR, procurement, payroll and any managers responsible for recruitment, who will know what services are required, what terms will apply and whether the terms change over the course of the relationship with the worker.
In-house legal may want to:
Coordinate discussions and sharing of information between the business heads of all relevant departments;
Carry out an audit of workers who provide services via intermediaries;
Review the labour supply chain to check if there are any concerns about compliance;
Be involved in or review the SDS process, especially if this has been outsourced;
Monitor the size of the organisation to determine whether it falls within or outside of IR35;
Regularly review arrangements with workers and intermediaries.