Contractors who work through personal service companies (PSC)and contract to private sector businesses will see their contracts brought under tighter scrutiny from April 2020.
It will be the role of the private company to decide if the contractor is working under a contract and has the working practices which would indicate them to be working as an employee. If the contractor fails the tests they will pay tax and NIC as if they are an employee.
The tests which define a self-employed individual from an employed individual are complex and will not be within the sphere of tax knowledge of HR departments. The result will be incorrect decisions being taken affecting the invoice amounts paid to legitimate contractors.
In the Autumn 2018 Budget there was a collective sigh of relief when the expected Private Sector IR 35 changes have been delayed until April 2020 (at the earliest). As a profession and as industry operatives we all have a period of some 16 months to “put our house in order”. What we mean by this is making the case that IR35 does not apply.
End Users are very unlikely to do anything other than assume that a PSC is “caught” by IR35 and to then deduct tax and NIC from the invoices issued by the PSC, therefore they will pay the gross sum less income tax and employers NIC plus the full VAT on the invoice (where applicable). In the Public sector there is anecdotal evidence that End users have actually deducted Employers NIC from the invoiced sum!
It is interesting that the expected implementation date of April 2019 has been pushed on a full year, but perhaps this should not be surprising as there is sufficient anecdotal evidence to suggest that contractors leaving the public sector due to IR35 changes, had a negative effect on many public sector projects. It would appear that the Government wants to iron out any kinks in the public sector model (If that is possible) before they take on the private sector.
So what now for the owners of Personal Service Companies? Well the option to do nothing is in our opinion sheer folly. Action must be taken to try to win the argument that your company is not caught by IR35. These are complex matters and whilst it would be nice to provide a checklist of things to do to ensure compliance, that would be dangerous and could become counter-productive. It could lull us into a position of false security.
Certainly we advocate a contract review as a starting point.
Using HMRC’s Check of Employment Status for Tax (CEST) tool would do no harm, however there has been a Summary of Responses to the test and noted “HMRC is looking at where the CEST tool, along with wider guidance might be improved” and acknowledges the requirement from respondents that the tool must say more about mutuality of obligation (but doesn’t commit to doing so).
Returning to the Budget Brief, contractors may be comforted that the reform will not be retrospective: “HMRC will focus its efforts on ensuring businesses comply with the reform rather than focus on historic case.” Moreover, “HMRC will not carry out targeted campaigns into previous years when individuals start paying employment taxes under IR35 for the first time following the reform and businesses’ decisions about whether their workers are within the rules will not automatically trigger and enquiry into earlier years.” Mmmm.
How will medium and large businesses make their decisions? Will they take the view that there is a balance to be struck between reviewing hundreds of engagements each year and/or simply determining that those below a particular level are caught?
Agencies will take centre stage: fee-payers and also decision makers. Caught between end clients wanting them to produce solutions to retain the best contractors and the pressure from PSC’s desperate for engagements to be deemed “not caught”, offering processes that demonstrates due diligence – possibly backed by insurance-will become attractive propositions to end clients who want no interruption to their supply of temporary resource, nor the repercussions of incorrect status decisions.
This has been a brief review of where we are right now.
Here is our top tip: If you are a contractor working through a personal service company we recommend you undertake a review of your contracts and working practices to assess if this legislation will apply to your invoice payment from April 2020.
For all of its faults, using the CEST tool could assist you in determining just how much difficulty you may have in getting an agreeable status, or it might give you sufficient peace of mind to go onto ensure, as far as it is possible, that you have a position which may protect your IR35 status.
The final point we make is a question: Are Umbrella companies capable of being part of the positive solution you seek?
Doing nothing should not be an option.
At Fyfe Moir & Associates we want to be on the front foot with regard to the foregoing. We will therefore be holding a seminar in January 2019 and if you are interested in attending such a seminar, where all of the aforementioned and much more will be discussed, then please register your interest by emailing alan@fyfemoirassociates.com
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