Will it still be possible to operate a contract outside of IR35?
Absolutely, HMRC believe only one third of current contractors will be affected by these reforms. With the correct advice, training and processes it is very possible for End Clients and Contractors to continue with their current engagement structures.
What is the meaning of an End Client?
The company that directly receives the services of the Personal Service Company (PSC) worker.
Who is the Fee Payer and what responsibilities do they have?
They are typically the party closest to the PSC in the contractual chain (i.e. the party physically paying the PSC) and they are responsible for ensuring the correct tax treatment is applied to the PSC. The below contract chains have been provided to help understand how this would look like in the real world:
End Client to Managed Service Provider (MSP) to Recruitment Agency (Fee Payer) to PSC
End Client to MSP (Fee Payer) to PSC
End Client (Fee Payer) to PSC
What is a Status Determination Statement (SDS)?
This is a written determination, created and distributed by the End Client, which provides a conclusion on whether IR35 applies to the engagement and must be supported with reasoning.
I’ve heard that Small Companies are exempt from the reforms?
That is correct and where an End Client satisfies at least two of the below criteria, the responsibility for determining IR35 status will remain with the Contract worker:
Turnover of no more than £10.2 million
Balance sheet total of no more than £5.1 million
No more than 50 employees
What responsibilities will fall upon an End Client?
Review all working conditions of a PSC contract and determine whether they fall inside or outside of IR35
Declare this determination within a Status Determination Statement (SDS) before the associated assignment begins
Distribute the SDS to all within the contract chain but especially the PSC/Contract Worker
Implement a determination disagreement process and ensure all cases are responded to within 45 days of being lodged
Continually monitor all outside IR35 contracts to ensure they do not inadvertently move inside IR35
How long will an SDS remain relevant?
Any changes effecting an assignment (project deliverables, project duration, etc.) could impact the initial determination, so a new SDS should be made. However, it is best practise to conduct a review on the initial SDS every 12 months in case any unknown changes have taken place.
What is a Statement of Work (SOW) and can this be used to circumvent the IR35 reforms?
A SOW is a document used in project/contract management and covers the working agreement between two parties. It will stipulate the total price and time frame for delivering the project, including any penalties and/or costs should it overrun, and is commonly used by consultancies when undertaking projects with End Client’s.
In principle a worker being paid through a SOW rather than a time and materials basis (per day/hour) could be considered outside of IR35 due to the level of financial risk being undertaken. However, the worker will need to be remunerated in accordance with the SOW, incurring the documented penalties for delivery slippage, since HMRC’s employment test will review actual working practises. To remain outside of IR35, the worker could see a significant decrease in their take home pay if/when they miss the SOW deliverables, which may not be seen as an acceptable risk to them.
I’ve heard that any tax debts can be transferred to other parties in the chain. What does this mean?
If at any time HMRC are unsuccessful in collecting tax and National Insurance Contributions (NIC’s) from the Fee Payer they can collect funds from all other parties in the chain. Similarly, if a party fails in their responsibility to share the SDS, HMRC can seek to recover any unpaid tax and NIC’s directly from them.
I am an End Client who is located outside of the UK but engage UK based Contractors. Are the IR35 reforms going to affect us?
If you engage the Contractor directly with no one else in the supply chain and you are wholly based overseas, so there is no UK connection in the form of being UK resident or having a permanent establishment, then this engagement is outside the scope of the IR35 reforms. In this case the PSC remains liable for determining the workers employment status.
I like the flexibility of managing my own finances through my PSC. If I am deemed as Inside IR35 do I need to close it?
No, you can engage the Fee Payer through your PSC although the Fee Payer must deduct the relevant tax and NIC’s before remitting a “net” payment to your PSC. It is worth noting that although you will be taxed as an employee, you will not receive any additional employee rights as you will continue to be employed by your PSC.
What financial impacts will being inside IR35 have to a PSC/Contract Worker?
Their take home pay will reduce as addition NIC’s, both employer and employee, will need to be taken from the gross day/hour rate. The PSC will also lose the ability to claim 5% of turnover as allowable deductions to cover the costs of operating the PSC.
What is an Umbrella Company and what are the benefits of using one?
An Umbrella Company is a company that employs workers who are engaged on temporary contract assignments. They provide payroll on behalf of the contractor and bills the agency (who in turn bills the client) for work completed by the contractor.
Working as an Umbrella Employee all finances are managed on their behalf and taxes will automatically be deducted, so there will be no nasty surprises. It also means that IR35 will not be relevant. The worker will get all of the benefits of being an employee, with the freedoms of being a contractor, giving them the best of both worlds.