Major reforms to off-payroll (IR35) rules within the Private Sector are scheduled to take effect from April 2020.
This will mean that the responsibility will be switched from many contractors to the end client. Their IR35 status of being inside or outside will have significant affects.
The rules are not exactly straight forward but it is important to understand what they will mean to your agency as well as your end clients and contractors, so that you can make an informed decision about the best way to deal with them.
Current Rules:
The contractor is completely responsible for working compliantly including paying the correct taxes.
If the contractor agrees to an assignment that classes them “outside IR35” through their Limited Company, the contractor is paid a gross rate by the agency.
If the assignment is later declared not to be outside of IR35 then the contractor will be liable for all unpaid tax along with any penalties and interest levied.
What is actually changing?
New Rules:
The End Client is now responsible for any IR35 assessments, yet the agency will be held liable in the first instance for any unpaid taxes should HMRC successfully challenge the assessment.
The end client will now have the responsibility as to whether the assignment falls either inside or outside of IR35, issuing a Status Determination Statement (SDS) to both the agency and the contractor.
Should the end client issue an “inside IR35” SDS then they have complied with their obligations. If your agency then ensures the contractor is paid via either PAYE or through a compliant Umbrella provider then there is no liability or risk for anyone.
What is actually changing?
Current Rules:
The End Client has no responsibility for any IR35 assessments or any liability for unpaid taxes.
The Agency also has no responsibility for any IR35 assessments and again is not liable for unpaid taxes.
The Contractor however IS responsible for any IR35 assessment and would be liable to HMRC for any unpaid taxes.
What is actually changing?
New Rules:
Now the End Client will have responsibility for the assessment as well as being liable for any unpaid tax after the Agency
The Agency will be the first port of call for HMRC for any unpaid taxes by the contractor.
The Contractor is now not responsible but will be affected by the response from both Agency and End Client.
What are the risks?
Under the new rules, there are a number of areas the Agency can be exposed to risk.
Risk 1:
The End Client makes an “outside IR35” decision.
Should this be challenged by HMRC and be successful then the liability for unpaid tax sits initially with the organisation that paid the Contractor Limited Company. Then the top Agency in the chain supplying the worker to the End Client, even though the End Client made the “outside IR35” status determination.
If the Agency cannot or will not pay then the liability moves onto the End Client
The Solution – Agree with the End Client that all Contractors will be assessed utilising a reliable assessment tool.
Risk 2:
The End Client makes an “inside IR35” decision.
Even though the Contractor is treated in a compliant manner by the End Client and the Agency, there is still a risk to your organisation, should further down the supply chain the Contractor is paid by another party that has deemed them “outside IR35”.
In which case the liability would sit initially with the organisation that paid the Contractors Limited Company. Then the top agency in the chain (next to the End Client) supplying the worker to the End
Client. This could be your Agency or an Agency that you supply, even if that Agency has itself acted compliantly. If you as the Agency or the other Agency cannot pay the liability, it then moves along to the End Client themselves.
The Solution – Pay the Contractors via a compliant PAYE model such as an Outsourced Payroll Provider but also ensure full visibility with all Contractors going through just one compliant supplier engaged near the top of the chain.
Risk 3:
Commercial risk.
This is where the Contractor has been used to having their pay using the “outside IR35” Limited Company route and then have to be paid via PAYE/Umbrella. Taxed as an employee the cost of employment is going to be greater and the Contractor will face a higher tax bill on the income they receive.
Some Contractors may very well refuse to work on this basis.
End Clients and Agencies that no longer engage Contractors via a Limited Company may very well be left with a skills gap and even risk the possibility they will move to a competitor. Therefore, the Contractor receives equivalent NET pay the End Client/Agency would need to add additional funds to the rate to cover the extra taxes and costs of employment. This will increase the cost to the supply chain for engaging talented resources.
Why utilise ePayMe Limited?
We have been established since 2010 working in this highly competitive sector.
We are accredited with Professional Passport, CIPP and members of APSCo.
Unrivalled Customer Service and market leading rates.
If you would like any further information surrounding IR35 and what we can offer then please do not hesitate to contact our team on 01252 863 700.