IR35 Basics: A Five Minute Read for Hirers
It’s generally well known that changes to the governments ‘off-payroll’ rules (known as IR35) for the private sector come into force in April 2020. If your organisation engages or hires contractors/self-employed workers then you’ll probably find this blog a useful read.
Paul Jackman: Thorn Baker Group CEO
As you’d expect with any change in employment legislation we’re well prepared to keep our clients fully compliant.
This blog will give our perspective on the challenges ahead and will be updated from time to time as we approach the deadline – it’s not legal advice and we’d strongly recommend you check out the suggested links for further reading at the end of this blog.
What is IR35?
Introduced back in 2000, IR35 is a set of tax rules that was introduced for workers (who typically refer to themselves as contractors) who provide their services via an intermediary, typically their own limited company. The aim of IR35 is to tackle tax and National Insurance avoidance by individuals who are effectively known as what is termed a ‘disguised employee’.
Workers are either ‘Inside IR35’ where PAYE deductions must be made or ‘Outside IR35 where PAYE deductions do not need to be made
Simply put, if the workers' relationship looks like one of an employer/employee relationship, there is a good chance they are inside IR35 and PAYE and National Insurance deductions must be made.
What Changes will happen in April 2020?
The responsibility moves to the end client for deciding if an engagement is inside or outside IR35. Currently, this decision is for the worker to make. If however the end client is deemed to be a ‘Small Company’ then the responsibility stays with the worker
Is My Business a Small Company and Therefore Exempt From These Changes?
If your business meets at least two of these requirements you don’t need to be too concerned about the changes to IR35
- Annual Turnover less than £10.2m
- Balance Sheet total less than £5.1m
- No more than 50 employees
We’ll be using Companies House to verify the status of our clients accordingly. If you are a small company then you don’t need to read any further.
How Do I Know Where These Types of Workers Are in My Business?
Only by carrying out a thorough audit of everyone in your business that is not a direct employee and who may be in your business next April. We have discovered that many of our clients have limited knowledge of the methods that non-direct employees are engaged. For example, your recruitment agencies may be using a wide variety of vehicles to provide the people who fill your vacancies, be that through PAYE, CIS intermediaries, Umbrella Companies or Personal Service Companies. Many clients have a significant number of ‘direct hires’ that IR35 impacts such as IT consultants, part-time FD’s or those individuals that are brought in on a project-specific basis. Things to consider: Who in your company is best placed to do this audit? Who may be joining you between now and April 2020 and what is their employment status?
Deciding If a Role is Inside of Outside IR35?
Making this determination runs to a level of complexity way beyond a mere website blog but a good starting point is to use the online tool CEST (Check Employment Status for Tax). HMRC will stand by the outcome providing you have used reasonable care to use it. The latest version came out as recently as the end of November 2019.
There are other methods, most commonly being the use of IR35 consultants – or your own professional advisors.
You’ll need to decide who is responsible and accountable within your business for making the decision (s) and how you will maintain appropriate records. If you have a HR department they should be well underway with IR35 preparations.
Anecdotal evidence for the roles that we specifically recruit for in the Construction and Facilities Management Sectors suggests that they will virtually all fall within IR35
Cascading the IR35 Decision
If a client makes a decision on a role, the decision and the reasons for that decision need to be passed down to all parties in the supply chain including the worker. This is usually done via a ‘Status Determination Statement’ (SDS) which the end client has to prepare and issue. We’ll have to assume that all our roles are within IR35 unless we receive an SDS to the contrary.
Who Makes Deductions if Inside IR35
The Fee Payer (i.e. the organisation last in line who makes payment to the worker’s intermediary) is liable for making the correct deductions for deemed employment so clients can rest assured that Thorn Baker can operate this compliantly and make the necessary quarterly reports to HMRC.
If an incorrect decision is made and a worker is treated as outside IR35 when they should be inside IR35 then liability will rest with the party that has failed to fulfil its obligations – so if the wrong decision is made then the end client will be liable for unpaid PAYE and National Insurance.
Ok, I’m Starting to Get This. What’s This Likely to Mean in Commercial Terms?
So this is the really interesting thing – let’s examine this from two perspectives, the cost to hirer and the cost to the worker.
Workers/contractors are very vocal online about how these changes are going to significantly impact their take-home pay.
These are the workers who 1) currently deem themselves to be outside IR35 and thus benefit from let’s say ‘beneficial’ arrangements and 2) believe they will be deemed to be inside IR35 once the end client makes the decision. (One could argue that in this case perhaps the workers have made an incorrect determination – but nevertheless they currently are liable and responsible for that decision)
We’ve done the sums and they are quite startling. For a hirer that may have a worker via a PSC outside IR35 on £25 hour x 40-hour week = headline pay of £1000/week, a typical weekly ‘take-home’ pay will be £805. Moving this worker to full PAYE employee status with Income Tax, National Insurance and Holiday Pay Contributions will increase the cost to £34.22/hour to maintain the same take-home pay. And that’s before any agency, including Thorn Baker, adds on their desired mark up.
How many people can afford to have a significant reduction in take-home pay? How many end-users can afford to pay 37% more for the same individual doing the same work as before? If the end-user cannot or will not pay any more, the take-home reduction will be of the order of 20%
Quite simply, the costs of end users making ‘inside IR35’ decisions may be quite alarming for many clients, especially if tied into long term contracts where the cost of workers is a significant proportion of overheads.
It’s not the scope of this blog to talk about workarounds or explore loopholes but with planning, the right advice and enough time it may be possible to redesign roles to fall outside of IR35. With our first-hand knowledge of our clients and the sector’s that they operate in we expect the vast majority will deem all their roles to fall within IR35. What will then happen may include
- Transition to Perm (We will happily discuss a sensible take on fee)
- Continue to pay as a PSC but make PAYE deductions
- Move workers to Umbrella solutions
- Move workers to agency PAYE
With the exception of taking on permanently, it will cost a fair bit more. Small Companies may find themselves gaining a competitive advantage as their hiring costs are impacted less.
The Thorn Baker Approach
As Corporate Member of the REC (Recruitment and Employment Confederation) and APSCO (The Association of Professional Staffing Companies), we have frequent updates on IR35 and access to qualified legal support. You can be assured we’ll keep you, our clients, compliant.
Because the scope of IR35 is so vast, across all of UK businesses and not just our specific sector knowledge, and carries significant liability issues we would remind you that this blog is simply our current perspective.
What we are doing is talking to clients on a daily basis to ‘nudge’ them towards dealing with their IR35 challenges and our Directors and Senior Managers are putting IR35 on the agenda of every relevant client meeting to ensure we’re adding clarity and transparency to future arrangements.
If you would like to discuss any of the points raised in this blog, or simply arrange a conversation about IR35 then please contact the writer email@example.com 07970 075160