What does the IR35 change in the spring mean to you?
This change in IR35 regulation has become the latest ‘end of freelance recruitment as we know it’ moment. As with new government rules there are often a number of grey areas that need to be interpreted. We at Aylin White are determined to keep our clients and contractors informed and within the rules. The following is my summary of the salient points.
‘IR35’ has been in place since 2000 and concerns ‘off-payroll’ workers. The intention of the legislation has always been to stop ‘disguised self-employment’. The original legislation put the onus on the contractor (PSC) to decide whether they were ‘inside’ or ‘outside’ the scope of IR35. HMRC will change this onus to the client (end user). The changes require the end user to make a Status Determination Statement (SDS) for the public sector in 2017 with the change taking effect on April 6th 2020 for the private sector. The SDS must happen before the PSC is engaged meaning end users must have clear processes for assessing the work. Overall, this means the change in IR35 in not in scope, but in responsibility.
HMRC is concerned that contractors and end users are not working in a truly business to business (B2B) relationship and are interested in those that claim LTD company status while reaping the benefits of employed persons with none of the accompanying risks of running your own business.
What does this mean for our relationship with you?
This change moved the risk of failure to comply with HMRC rules to End User clients rather than with independent contractors. This means its critical in this new legal environment for the End User to engage as a partner with credible, conscientious firms who have demonstrated a commitment to honesty. Trust in the quality of partner is key to mitigating any end user risk.
Risk may also appear as a reaction to these changes. Pre-April 2020 terms which claim that all contractors are under control may invite questions from HMRC. In the same way, blanket policies pertaining to ‘off-payroll” rules may also not be as risk-free as hoped. As consultants active in helping service providers with specialist skills engage with client needs, we see risk that blanket rules might cut off partnering with that service provider, hindering project performance. Being able to rely on knowledgeable partners with evidence that they have thought through the problems, contractual and otherwise, is paramount.
Legislation has created three main and six minor tests for IR35
Control and Direction
The contractor’s experience should dictate their ability to take a piece of work, a task or a package and deliver under their own control, as in deciding the way they carry out the task.
Right to Substitution
Should the contractor (PSC1) need to leave site for a period that requires substitution, they should be able to send a replacement, subject to client approval. The replacement (PSC2) would be subject to the same compliance checks as PSC1.
Mutuality of Obligation
Should work not be possible/ continuous, eg due to weather or delay in client supply chain, the contractor would not be entitled to receive pay, nor receive pay in lieu of notice etc and the End User has no obligation to provide alternative work.
Much discussion is around how many of these must be met in order to be compliant. For example, should a specialist service provider not easily be able to provide a substitute due to the nature of the specialisation, should this be a black and white decision? In our view, below are a good sample set of questions to help on the main tests.
The six minor tests
The contractor should be prepared to correct any work in it’s own time where it has been found to be substandard. Candidate to maintain Professional Indemnity (PI)insurance to insure risk. The candidate should be responsible for cost of PPE, training needed to deliver the project they are contracted to deliver.
In many cases the equipment is supplied by the end client as it is project specific or they have better commercial terms for purchase and hire agreements, but the contractor should be prepared to hire equipment externally subject to the agreement with the client.
The more aligned with normal B2B payment terms the better.
The contractor has the right to price work elsewhere and work for other companies and is therefore in business on its own account.
This is typically via a website, but often via a LinkedIn profile that clearly states their LTD company as their employer.
The recommended route is that a LTD company contractor identifies themselves on site as subcontracting and makes clear their LTD company name, but an end user should certainly take steps to identify them as not employed directly. This could be email@example.com as opposed to firstname.lastname@example.org. Typically for data security it is necessary for the contractor to have a company or project specific email address, but either way it is essential they are obviously not an employee. The contractor should only have access to facilities that are necessary for completing the project. The contractor should not have the right to access staff only resources.
So, some questions that you may want to ask when assessing:
Are individual contractors liable for any errors they make?
If they are covered by the client’s insurance, this implies they are risk free and the HMRC may see this as showing that they should be PAYE. Having the appropriate levels of insurance is key to showing that this is a B2B relationship.
Control – The End User client will always have to instruct a subcontractor on site what they need to do, but do they expect the business they have contracted to use their own skills to make decisions that will lead to the completion of a task?
If they are working without a continual level of direction and control and able to make their own decisions, then HMRC should see them as not having direct control.
Substitution – It may never happen, but if a contractor was not able to make it to site for any reason, would you allow them to allow someone of equal skills, experience, references and tickets to be substituted by your current contractor, paid through your current contractors company for equal cost? The engaged contractor would manage information flow.
Mutuality of Obligation – Are you hiring someone to work long-term for your company, move projects if they work out well and become a member of the team or are you hiring a contractor to fulfil a defined role on a project that will end when the project ends? If you have another project that needs similar skills you may re-engage on a new basis, but will let them go if the project finishes early, they do not have the right skills and would require training, etc
What are Aylin White doing to make sure this is clear for our clients and PSC’s?
Aylin White has worked closely with an experienced IR35 specialist law firm to update all our contracts in line with new legislation. This includes terms with our umbrella PSL, master terms to our clients and terms for umbrella and PSC contractors. We believe that if a client checks these they will find that the contract between end user client, fee payer (Aylin White Ltd) and contractor/ PSC is aligned and IR35 compliant.
Aylin White has also engaged with QDOS, an IR35 specialist that has been working on the public sector implementation of this since before 2017. QDOS is a leading supplier of IR35 insurance and has been chosen as it’s IR35 checks are done by humans, not just a computer. This means we engage with the grey areas of the legislation.
Aylin White has spent the last six months doing exhaustive checks on various umbrella companies and has created a PSL of five companies that are all FCSA compliant. FCSA is the umbrella company ruling body and to be a member you must subject yourself to HMRC checks.
All members of the leadership of Aylin White have also extensively engaged with industry to agree how assignments are honestly discharged to make sure we are complaint with the spirit of the law, not just the letter.
If you would like to discuss any of the points raised in this article further, please contact Simon Perdoni on email@example.com or call on 020 3056 1950.
This is an opinion piece. Any views represented in this piece are personal and intended for informational purposes only. The owner will not be liable for any losses, injuries or damages from the use of this information.