IR35: The wider implications

In part one of this article, we saw how next year’s changes to IR35 might affect the gig economy – now we are looking at what are the implications for other stakeholders.

“It’s essential to know who the engager, the worker and the fee payer are, and understand the supply chain,” says Justine Riccomini, Head of Taxation (Scottish Taxes, Employment and ICAS Tax Community) at ICAS.

“The engager is whoever engages the contractor or worker to do the work. When engaging someone, the engager will now have to make a decision about that worker’s employment status.”

The duty of the engager

Riccomini says, “the engager has a clear duty to make a decision about whether any worker they engage is operating inside IR35 or not and produce a Status Determination Statement (SDS).”

The engager then has to pass this information on to the worker – “with the reasons for their decision-making process. They also have to tell whoever is paying the worker – this might be them, or an agency, or another party.”

If they don’t pass this information down the chain, Riccomini says, “they will be responsible for deducting and paying over the PAYE and NICs, including employer’s NICs. It used to be the worker’s responsibility, but the decision about their status will now be out of their hands.”

They are entitled to query the decision, “but HMRC has stepped away from facilitating an appeal and mediation process.”

Layers of complexity

For Riccomini, there are now “three layers in the IR35 universe.

1. The public sector version
2. The private sector for large and medium-sized companies version
3. The private sector for small companies version.

Each requires a different approach.” Engagers, agencies and workers “each need to understand what the three layers are, decide and agree on which applies in that particular context and inform relevant parties. It used to be rather simple, and now it’s rather complicated.”

How this will affect agencies

For the agency, “the majority of scenarios won’t involve a lengthy supply chain. But if you look at the oil and gas sector (for example), there might be a dozen stages to the supply chain – different agencies for different types of specialist work.”

Everyone has to pass IR35 responsibility down the chain until it reaches the fee payer, or become responsible for PAYE and NI themselves. “If there’s a failure further down the chain – let’s say one of them goes into administration – the transfer of liabilities provisions in the legislation ensure the liability passes back up the chain, and the first agency at the top might end up liable.”

This may give Agency 1 an accounting headache too. “If there is a chance the liability might pass back to them, they would need to note a contingent liability in the accounts.” This seems “rather inequitable in view of the fact the agency effectively becomes liable for something which it neither had any influence over in terms of the status decision nor for which it has agreed to pay the fees.”

A further stakeholder in all of this is the payroll provider. “They need to be provided with the right information, including whether the worker is a Scottish, Welsh or ‘rest of UK’ taxpayer. If payroll agencies are not properly informed, the payroll returns may be submitted incorrectly.”    

What happens next

“Agencies are going to be worried by this,” says Chris James, Head of Accounting Operations at JSA Group and Chairman, FCSA. “They will look at the law and can’t guarantee that they won’t end up with liability – and that’s a big unintended consequence of this legislation.”

It’s almost impossible to exert control over every part of the supply chain, he points out. “HMRC’s view is to say – you need to know the employment status, and compliance performance, of everyone in the chain. But that can hamper agility, adding administrative burdens at each step in the supply chain, and stifle entrepreneurship and growth.”

The knock-on effects of this are going to be problematic, James says. “I agree with aspects of the aim, but the legislation is so rushed and ill-thought-through; it’s a sledgehammer to crack a nut and it will damage flexibility for a significant time – especially while Brexit is going on.

It will harm a lot of flexible work projects, and the amount it will generate is less than £1 billion a year – compared with the impact on the business on having to deal with this, the net impact on the UK will not save anything.”

How this affects the individual contractor

For the individual contractor, “a lot of contractor jobs are in finance and IT. Finance and IT don’t need to be done locally. I’m already aware of some companies announcing that they might not use contractors any more and a lot of these businesses are international.

The thought process is – if it’s harder to do business in the UK, we have Europe and the USA to go to for our project work.”

The changes make little sense, James says. “We want to make the UK as good as possible a place to do business, we have Brexit to navigate and now we put this in at the same time – why?”    

Umbrella companies

A potential unintended consequence of the revised legislation “is a mushrooming of Umbrella Companies (UCs) appearing between contractor and engager,” Riccomini says. “Some will be legitimate, and some won’t.

How does a contractor know who’s legitimate? – they will all have a good-looking website. The idea is that if you join an Umbrella Company, you are working under an employment contract and the UC deducts the PAYE and NI. But, there’s no way an unrepresented individual would know how secure that is.” There is no legal definition of an Umbrella Company, Riccomini says, “which means they are unregulated.”

Riccomini’s understanding “is that many contractors are now being approached by UCs, being enticed to give up their Personal Services Companies and go with the UC instead. Some might claim the contractor will pay less tax than they did before, or even claim that they are ‘HMRC-approved,’ when there’s no such thing.”

Accountancy practices too might fear that they will lose some of their clients who have Personal Services Companies to UCs. “It will be hard to stop them going, but what accountants can do is to set out the differences in the available services and advise their clients to check the UC very carefully before they jump.”

IR35 – How each stakeholder is affected

• Self-employed people need to check their status and be clear about whether they would be deemed inside or outside IR35 for current and future contracts. From April 2020 the decision on status will be taken out of the worker’s hands – so they need to communicate clearly if they are sure they are outside IR35 when taking on contract work.
• Accountants need to run IR35 testing for clients. But as part of this, recognise that many people will still be working legitimately outside IR35 and the doubt amongst organisations about whether or not to engage contractors needs to be clarified – blanket decisions should not be taken. Only those working via personal services companies, who are working for large companies, and who might be deemed as employees from a tax point of view, are affected by the changes.
• Engagers need to be aware of the IR35 responsibility that is now placed on them from April 2020 and run IR35 tests on their contractors as part of this.
• Agencies need to be aware that liability can bounce back to them in the event of a problem down the line that they have no control over.
• Check the legitimacy of umbrella companies before signing up to them. “The best way to do that is with an FCSA membership check,” says Chris James. “The single clearest indicator of non-compliance in the umbrella market is unusually high net pay illustrations or payments.”

Further reading on tax:

• From railways to hospitals, how IR35 sent employers off the rails
• Power up your tax knowledge with AAT
• Opinion: What are the prospects for more devolved taxes

Mark Blayney Stuart is Business Journalist of the Year, Wales Media Awards 2017 and Former Head of Research at the Chartered Institute of Marketing.