As the 6th April rapidly approaches, we are aware that the planned changes to the Off-Payroll Working Rules will increasingly be at the forefront of many limited company contractors’ minds, and as such we felt it worthwhile to clarify a couple of points with our current contractor community.
For those not aware, the changes due to take place from 6th April 2021 were originally intended to be introduced from April 2020 but were postposed for 12 months due to the Coronavirus pandemic. There was fleeting talk that the new rules may be postponed for a second time, but that now looks highly unlikely so Contract Scotland is operating on the assumption that the new rules will take effect from this April. The most fundamental and significant change to the rules relates to the party responsible for conducting the status determination for each individual assignment, with a view to determining if the off-payroll rules apply – referred to commonly as being “inside IR35” or “outside IR35”.
Up until the 6th April 2021, it has been the responsibility of the individual operating the limited company themselves to determine the status of the assignment and pay the appropriate taxes. From then, the responsibility for determining the status of the assignment will now pass to the end user client, while the responsibility for ensuring appropriate taxes are deducted and paid to HMRC will pass to the entity responsible for paying the limited company – referred to in the legislation as “the fee payer”, which, put simply, means the recruitment agency you are working through.
Understandably, we have had a number of our limited company contractors contact us to request updates on the status of their current assignment and to what extent they may now fall within the scope of the new rules or remain outside of scope. For now, very few status determinations have been carried out, but we will be working closely with all clients in the next month or two to understand their approach to the status determination process and offer our advice and support where required. As the law requires that it is the client that conducts the status determination, we are unable to proceed without first engaging with them and we do not have the authority to make the determination without their input.
Contract Scotland has, in the last 12 months, been working with an IR35 specialist to develop an automated tool that makes the entire status determination process much more streamlined and offer far greater transparency of process, and our plan to launch our IR35 Status Determination Tool in the next week or two. Not all clients will want to work with that tool, as many will have developed their own processes, but where clients do choose to engage with the Contract Scotland tool there will be no charge to either the candidate or the client for the Status Determination process. We will be providing this service free of charge. Where clients have their own processes in place, we will work with those processes and immediately advise contractors of the outcome.
We fully appreciate the anxiety there is over the new rules and their potential impact, and we understand contractors are very keen to understand as soon as possible the extent to which they will be affected. Our intention is that we will be able to say far more about the status of each of your individual assignments in the coming month and as soon as we have been able to engage with your end user client and understand their processes.
We will be in touch again as soon as possible to discuss next steps.
In the meantime, if you have any questions in relation to IR35 please submit those to IR35@contractscotland.co.uk and we will reply to you within 24 hours.
The off-payroll working rules will still apply irrespective of how many clients and assignments a contractor is working on. There is the argument that if you are working on multiple projects for various clients, this will demonstrate that you are in business on your own account as an independent contractor, and therefore fall “outside IR35”. However, your IR35 status is assessed on an assignment basis – working for multiple clients is not a significant indicator of being in business on your own account; the IR35 status for each assignment is judged on its own merit.
From April 2020, all public sector authorities and medium and large-sized private sector clients will be responsible for deciding whether IR35 applies. If the client either 1) fails to make a status determination, 2) fails to pass the status determination down the supply chain, or 3) fails to take reasonable care when making the status determination; the client may be liable for the tax and NICs as the deemed “fee-payer”.
Contractors are advised to engage with their agencies and clients regarding the new rules to help to ensure that all parties are prepared for April 2020. It is important that clients exercise reasonable care when making a status determination, given the issues that arose from the public sector reform in April 2017 as a result of blanket “inside IR35” determinations.
If you are providing services to a small private sector client, they will be exempt, and they are not required to follow the new IR35 rules. Your PSC will remain responsible for determining your IR35 status and making the appropriate tax deductions and NICs.
We have concerns about converting a current time and materials contract to a SOW contract as the contract must accurately represent the reality of what happens during the assignment. However, for new assignments with new clients this is an option for highly skilled contractors.
In an assignment where a contractor agrees to perform specific tasks or deliver certain outcomes for a set price and within an estimated delivery time, there is less likelihood of the client exerting control over the individual. A Statement of Work (SoW) contract, if appropriately executed, is likely to be “outside IR35”, compared with the traditional time and materials-based contract on a set hourly or day rate.
It is more likely that an assignment will fall “outside IR35” if the performance of the services carries a genuine business risk, e.g. payment is conditional upon acceptance of services or satisfactory performance, and rectification of defects or poor performance are made at the contractor’s cost. Although this may seem like an easy option to adapt to the new rules, you will remain at risk if the reality of the contractual performance does not reflect the contractual wording. Please note that not all assignments are appropriate as a SoW contract, this will depend on whether the recruiter and the end client offer this option.
It is expected that you will be involved to some degree in the client’s status determination process, as there are some questions in the HMRC CEST tool which require the contractor’s input – for example questions on how you run your business. However, there is no statutory right for a contractor to be consulted during the status determination process.
The draft legislation imposes an obligation on the client to provide a “client-led status disagreement process”, either the recruiter or the contractor may disagree and follow the process. The client must respond to a request to review the status determination statement within 45 days. The client must either confirm the determination is correct, with reasons, or provide a new status determination statement reaching a different conclusion and withdraw the previous one.
If you disagree with the client’s determination, you will need to write to the client and give reasons why. You need to ensure you keep records of status determinations and any corresponding disagreements. During the dispute process the client’s determination stands.
If your assignment falls “inside IR35”, the take-home pay will be less as the recruiter has a statutory duty to deduct the appropriate tax and NICs. Be aware that historically, PAYE rates have always been lower than PSC rates so you may find that in future pay rates offered are lower.
Recruitment businesses cannot lawfully deduct secondary NICs from an agreed fee, but recruitment businesses may adjust the contractor’s pay rate to factor in the additional costs of supply which include employers’ NICs. Depending on your contractual terms, there may be scope for the rate to be negotiated accordingly.
Should you wish to continue operating as an “inside IR35” contractor, you will not benefit from any “employee rights” such as holiday pay, sick pay, pension contributions, dismissal rights etc. You may receive these benefits through your employment in your PSC.
If your assignment falls “inside IR35”, it is likely that you are no longer in business on your own account and could be within scope of the Agency Worker Regulations (AWR). Under AWR, you are entitled to comparable pay to a permanent employee on the client site. If you opt to engage via an umbrella company, you are an employee of the umbrella company and therefore you will benefit from employment rights and AWR will apply.
The 24-month rule is in reference to claiming travel expenses. This rule has no bearing on the IR35 status of an assignment.
There are suggestions that contractors could set up a limited liability company with a small group of contractors to allow them all to effectively exercise their right to substitution. This could be a practical way of operating provided that all of the contractors are directors and shareholders and collectively control the business. This will need serious consideration and bespoke advice.
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