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IR35 off-payroll working legislation: understanding the risk

on Thu, 11/03/2021 – 10:44
IR35 off-payroll working legislation:  understanding the risk

where does the risk sit and how will that affect decisions?

There is only a risk if an outside IR35 decision is given. Different parties in the supply chain can be found liable under certain circumstances:

• any party who fails to pass on the decision to the next party in the supply chain

• the hirer if they don’t take reasonable care making a decision

• the fee payer for not deducting the correct levels of tax before paying PSC’s who are inside IR35 etc.

However, essentially the compliance risk and liability affects the whole supply chain and ultimately sits with the end hirer as it can be passed up via debt transfer or the HMRC can choose to recoup from any party in the chain.

This will have big implications on supply chain compliance and behaviour and it is likely that most hirers will therefore take a risk adverse approach when making decisions. HMRC can challenge the decision and demand repayment of lost PAYE tax and national insurance plus penalties and interest for each contractor. A hirer’s gross financial liability for lost tax, national insurance, apprenticeship levy, interest and moderate penalties over a 3-year period for an average contractor earning £100,000 pa is well over £100,000. This is a big financial risk, and most hirers will probably not bear the risk!

how will hirers make status decisions?

HMRC’s CEST tool (check employment status for tax) allows hirers to check whether an assignment is outside IR35. If the tool says it is, and all answers were accurate and given in good faith at the time, then HMRC say they will stand by the decision and not challenge it. It is also worth noting that IR35 assessments can be made by role. They do not have to be made individually where contractors are doing the same role. There are many critics of this tool saying it is not fully based on case law, however HMRC have taken feedback and are making changes to it which should be available by the end of 2019. There are other non HMRC IR35 assessment tools available but note that they carry a tax risk which some hirers may be unwilling to take.

Many say CEST favours inside status decisions but if HRMC believe 9 in 10 decisions are currently wrong, then maybe it reflects what they expect it to? For long assignments, the IR35 decision should periodically be re-reviewed.

beware of the motivations of others!

You are likely to find yourself subjected to conflicting messages. Many accountants and providers of independent IR35 assessments will give false hope that you should challenge your IR35 status if caught inside or that they can provide you with a favourable assessment. It is wise to understand their motives with many wanting contractors outside IR35 to maintain their ongoing accountancy fees and revenue streams. It is good to remember that they will not be taking the financial risk.

what happens if you are now found inside IR35?

If you find yourself caught in scope of the legislation, you will no longer be allowed to be paid gross into your business bank account.

It will be the responsibility of the fee payer to deduct not only full, standard employees PAYE deductions but also the employers NI and apprenticeship levy costs from the invoice value before a net payment is made.

Fee payers or hirers may insist that you work through an alternative PAYE option such as an umbrella company or an agency’s own or outsourced PAYE. This will have a significant impact on your take home pay. As a general guidance, you can typically expect to retain as much as 80% of your income via a PSC if outside of IR35 (dependent on personal circumstances, expenses etc) compared with an average of 65% via most other PAYE models so this highlights the extent of the impact these changes will have.

what are the next steps?

Hirers need to start detailing their PSC populations by role and prioritising any that will be in scope when the legislation comes into effect. Many will be slow to react as it is not their day jobs and they may lack the resources and required knowledge. Recruitment agencies, fee payers and any other parties in the supply chain will need to work in collaboration with hirers to ensure essential supply chain compliance and will need to determine that suitable, alternative payment options are in place.

You need to start engaging with your agencies and end hirers to understand how and when their assessments will be made and what alternative options are available to you should you find yourself in scope. If, as a contractor, you are offered an assignment which extends beyond April 2021 you should consider your likely IR35 status under this legislation. The government’s CEST tool is free, readily available and anonymous, so it can provide you with an indication of what this might look like and is therefore, a good starting point.