Why you should be taking IR35 and Off-payroll seriously
Part 3: The responsibility for paying the right taxes is shifting - it could be your responsibility now.
Firstly let’s take a look at the position of the contractor. IR35 legislation has been around since April 2000 and has been requiring contractors to pay themselves in accordance with the rules associated with it. Ie, if you find yourself caught inside IR35, you should be deducting employers NI, employees NI and PAYE from your contracted pay before you take any home. At this level, the contractor is responsible for their own assessment of their IR35 status as well as all the financial cost (the taxes) of doing so. This is required to be assessed at the end of each contract. The suspicion of wide-spread non-compliance of these regulations is what has led to the newer off-payroll regulations.
Whilst a contractor works for a ‘small’ company, this is where the risk and liabilities remain. In order to assess their position, a contractor is entitled to request a statement from their hirer to confirm the companies size. This is a ‘Status Determination Statement’ (SDS) and companies should know what they need to contain as contractors will be asking for them.
When a contractor is working for a larger company, everything changes. This is when the new off-payroll regulations kick in. The new regulations switch the responsibility from the contractor and onto the hiring company. The hiring company are required to assess the contract at the start of the contract and keep it under constant surveillance. Evidence of this is required to be kept to ensure compliance also.
When off-payroll regulations apply, the cost of the contractor becomes increased as the hiring company need to be paying employers NI on top of the contractors fee. You’ll see this is a shift in the older IR35 position where the contractor pays for everything as it shifts the employers element onto the hirer. It’s important to take note of this, as deducting the additional cost from the contractor is unlawful. Passing the additional cost off to the contractor to absorb within their negotiated rates is also a risk as HMRC could claim for this to be tax evasion - ie, avoiding higher taxes as a result of under-paying contractors.
The SDS is a responsibility of the hiring firm. This has a certain degree of administration and cost associated to it. They are seen as the “top of the chain” and are required to pass the SDS down through the chain to the contractor. This ensures compliance at all levels in a chain. The SDS is not a simple box ticking exercise either. There is a requirement to demonstrate reasonable care in making the assessments. “Reasonable care” is something open to interpretation - but in our research we have found that this can require obtaining several sources of advise. HMRC have created their CEST (Check Employment Status for Tax) tool, but it has been commented on for it’s narrow scope and often incorrect assessments. ‘Reasonable care’ therefore would suggest that with this knowledge, relying on CEST alone is not enough to determine and assessment.
Where HMRC are unable to obtain unpaid taxes from the contractors, they have the power to transfer the liability to the hiring party at the top of the chain. It is therefore important for the hiring companies to ensure compliance throughout the supply chain all the way to the ultimate contractor. For example, if a SDS is not passed or or ignored by an intermediary party in the chain, the contractor is unlikely to be being compliant with the taxes being paid.
Since off-payroll requires ongoing assessments, it is important to review the following in order to remain ‘outside’ IR35;
· There is a valid right of substitution of the contractor
· There is no valid right of control being exercised by the hirer over the contractor
· There in no obligation on either party to provide or accept the work
· The scope of the work is clearly identified and there is no work being undertaken that is outside the scope agreed
· The contractor only gets paid for work actually completed as per the scope.
These points are useful in making sure a contract is compliant, but they must also be followed and practiced in the day to day routines. HMRC and a court will take into the account a written contract, but also a ‘deemed’ contract - which is one that follows the actual practices regardless of what is written. Therefore a paper trail is not enough by itself.
Within these 5 points, it is the first 3 that have the most impact on determining an IR35 status, but there are other risks as identified in the first part of this series.
Paying Contractors found ‘inside’ IR35
If you find a contractor is ‘inside’ IR35 and you do not qualify under the small companies exemption, you need to pay them after taking deductions into account. Firstly, if there is VAT involved, the contractor still has to charge VAT and the hirer still has the right to reclaim it. Secondly, the rest of the fee is treated as if gross pay on a payroll. HMRC require the filings to be made via RTI. PAYE and NI need to be deducted and held back as well as adding employers taxes to the withheld amount for payment to HMRC just like PAYE on an ordinary payroll.
A payslip would be produced to explain the deductions and passed to the contract with payment for their records.
Contractors - The new regulations could see you taking home less pay. The payment you receive could be similar to that of an employed patrolled person, but without any of the normal employment benefits. A contract renegotiation may be appropriate - but remember that the hiring company will already be paying more in employers taxes. Responsibility for IR35 assessments from April 2021 is not within your control, but those above you in the supply chain. It will be important to work with them to ensure compliance.
Hiring Companies - unless you’re a small company, the responsibility for the IR35 assessments and ongoing surveillance is now with you. This must be done via RTI. Contractors will be looking to work with you to ensure compliance. Therefore it will be important to invest into compliance in order to continue to attract the right talent into your business. A contractors IR35 status is determined by both a written contract as well as by the deemed contract made by day to day practises.