OFF-PAYROLL Q&A WITH CHRIS JAMES
Chris is a Chartered Accountant with particular expertise in employment status and tax. He works with HMRC, Treasury, BEIS and Office of Tax Simplification policy teams on IR35 and off-payroll issues.
What do you think of the proposed reforms?
I’m deeply concerned about them. I’m worried that the whole situation is unclear for all parties – end engagers, agencies, contractors – so it’s difficult for anyone to know what to do in preparation. I also think the timing is dreadful. With Brexit on the cards, UK business needs support, not more bureaucracy.
What is your advice to end engagers, recruitment agencies and contractors?
The main message is: be prepared. Everyone involved needs to understand the proposed changes and work out their various options. Here at JSA, we’ve been running seminars and workshops, and visiting agencies, to help people understand what’s going on and how they will be affected.
It’s the supply chain which is the issue, isn’t it?
Yes, IR35 itself isn’t changing. If you weren’t caught by IR35 before the reforms, then you shouldn’t be caught afterwards. What’s happening is that liability is shifting. Whereas compliance used to the responsibility of the contractor, now it is the responsibility of everyone in the supply chain: contractors, agencies and end clients alike.
What does this mean for end engagers and agencies?
For each new assignment, and each extension, and when things change with the assignment, the end user (if not small as per a version of the Companies Act test) must issue a Status Determination Statement confirming the status of each assignment. This must be passed to the next party in the chain (usually the agency) and then on to the contractor. Failure to do so means liability for compliance, and correct taxation, rests with the end engager.
How can end engagers undertake proper assessments?
This is a big question! There are various options and there are pros and cons with each one:
- Employ some employment status experts – thought this is expensive.
- Use the government’s online assessment tool, CEST – though this has a poor reputation.
- Get an opinion from a firm of experts – this could be cost-effective but perhaps not efficient.
- Get access to a better tool – a combination of better online questions and expert intervention on difficult cases. Again, this might not be as efficient as it needs to be.
- Consider insurance – though there are limited options currently available due to the lack of clarity around the new legislation.
- Involve the whole supply chain – but that means harmonising the complete approach, which won’t be easy.
- Whichever way you approach it, there’s a lot of work.
That leaves the supply chain in no-man’s land?
It does at present. To be useful to the supply chain, assessments need to:
- Have a known and acceptable cost.
- Be able to operate quickly at high volumes.
- Fit into your existing procedures.
- Be documented and not over-ridden.
- Be accepted by the whole chain.
And for the process to work, there are a few things that would need to be in place. For example, end users must be involved and issue the decision; they would need to avoid making blanket decisions; the supply chain must keep evidence it passed on the decision, all while dealing with law which isn’t clear on what ‘reasonable care’ actually means. Not easy by anyone’s standards.
Can the supply chain protect itself?
Each part of the supply chain could protect itself but there is no way to completely remove liability.
- End user – passes liability on if it does the assessment and passes that on.
- Agency – passes liability on if there is another link in the chain and it can show it passed on the decision to the next party.
Separate fee payer – if there’s a separate fee payer and tax was not paid when HMRC think it should have been, then they go to the fee payer first. However, if HMRC can’t collect from the fee-payer, then they go to the agency. If they can’t collect from the agency, they go to the end client.
This is a difficult situation for everyone isn’t it?
Yes, but in theory, if an accurate, professional assessment is done, there should be no case to answer from HMRC. Plus, if the fee payer is following a procedure and is properly insured, then the agency and end user should not have the liability transferred to them, because the insurance would pay to fight a strong case. The Assessment is critical, but the criteria for assessment for IR35 has never been easy or consistently implemented, and there have been lots of successful challenges.
What do you think will happen if the legislation is introduced next year?
In an ideal world the law would be clear, the CEST tool would be reliable and the whole system set up so that it is easy for contractors, agencies and end engagers to operate.
In reality, what I expect to see next year, at least initially, is largely a repeat of what happened when the same rules were applied to the public sector in 2017: a blanket ban on the use of PSCs by some end engagers. Others will try to make contractors permanent though this will impact a) talent available, b) costs due to the potential need to increase rates to keep key individuals and c) business growth, due to the difficulty in retaining flexibility within the workforce.
What will happen to contractors who can no longer work through their own PSC?
Those contractors will need to go onto PAYE or use a compliant, FCSA-accredited Umbrella company.
If the contractor is inside IR35 under the new rules, can they still work as a limited company contractor?
They can, but it’s likely to be uncomfortable. The fee payer – whoever pays the PSC – has to deduct employment taxes from the invoice value after setting aside the VAT on the invoice. Then, the net pay and full VAT is paid to the contractor’s PSC. Many fee payers are likely to insist that if an assignment falls inside IR35 under the new rules, then the contractor takes a PAYE/umbrella option instead.
What steps do end clients need to take?
They need to ensure they fully understand the issue, look at their options and prepare. The first steps include:
- Determining the status of the PSC contractors you have.
- Getting a sample assessed.
- Finding out if you can make the situation better for borderline cases.
- It’s important to get professional help – we are happy to talk to and advice agencies, and work with them and their end engagers as appropriate. In addition, end users first need to confirm if they are ‘small’ according to the new legislation – if they are, the new rules don’t come into play and the contractors remain liable for their own IR35 status, just as they do today.
What should agencies specifically do?
- Talk to end clients to find out if they understand the rules.
- Work out what your end clients’ attitude is towards contractors – are they keen to retain them where that’s possible?
- Will the end clients be able to do status assessments?
- Can you do the assessments with them, with our help?
- What will your clients do with rates if engagement models change?
- Do they understand what will happen if their competitors are able to engage outside IR35, and they are not?
- Can aspects of work be carried out by an external service provider such as an external status assessment provider, and can you be part of that solution?
What should agencies ask their contractors?
- Do they understand the rules?
- Have they previously had their status assessed?
- Will they accept roles under PAYE?
- Have they spoken to the end client?
- What rate do they need to live on if they’re being offered a different way?
Is there a chance the reforms might not happen?
There’s a lot on the political agenda at the moment, so there’s always a chance, but I think it’s a slim one.
How can JSA help?
We are happy to talk to all parties to help them prepare for the reforms. Whatever the outcome, we can work with you to ensure compliance for all contractors, whether they are PSCs or Umbrella contractors.
If you have large volumes of PSCs needing to transition to Umbrella or PAYE, we have a strong track record in managing this process smoothly for all parties.
Get in touch with Chris and team on 01923 257257. Keep up-to-date by following our LinkedIn page and Chris’ on Twitter: @jsa_chris.