November's Autumn Budget announcement that the government will consult on "how to tackle non-compliance [with IR35] in the private sector" was welcomed guardedly by those involved in the recruitment sector. It was a reprieve from the widely anticipated April 2018 roll-out to the private sector of the off-payroll working rules put in place for the public sector last April. Commentators in the recruitment sector expressed relief that the government has chosen not to rush into rolling out the reforms to the private sector. However, most commentators believe it is only a matter of time before the off-payroll rules are implemented for the private sector and many feel that the consultation will be mere lip service.
On 6 April 2017, responsibility for assessing IR35 tax status transferred from personal service company ("PSC") contractors (and other intermediaries such as partnerships and sole traders) to staffing companies that place PSC contractors on public sector assignments. Under these rules, if the individual contractor who works on the assignment would be regarded as an employee of the public authority client for tax purposes if that client engaged the individual contractor directly, the assignment is within IR35. The staffing company is then responsible for deducting and paying deemed employment income tax and employee's National Insurance contributions from the fees it pays for the PSC contractor's services and for paying employer's National Insurance contributions. The staffing company is also treated as the employer for employment allowance purposes. Payments the staffing company makes to PSC contractors within IR35 count towards the staffing company's pay bill for the purposes of the apprenticeship levy, which it has to pay if its annual pay bill is more than £3 million.
Public authority end user clients have a duty to inform staffing companies that supply the services of PSC contractors to them whether they would regard the individual worker as their employee if they engaged the worker directly. They are required to take reasonable care in coming to their conclusion on status.
HMRC and the government appear to be down-playing the impact of the revised rules which has, in others' experience, been significant. The medical profession has been particularly affected, with NHS Trusts initially taking a blanket approach to IR35 and simply regarding all locums as employees and within IR35. A successful challenge was launched against this approach, with the result that NHS Improvement conceded that IR35 status must be assessed on a case by case basis. However, factors such as an apparent lack of training and guidance within the NHS, stretched resource and the inadequacies of HMRC's online status assessment tool, which is not designed to cover the sector specific circumstances of those who work in the medical profession, have led to locums continuing to be assessed as being within IR35. For at least some highly skilled, highly experienced consultant doctors, there are strong arguments against such an assessment. Contractors with other skills, such as technology, have moved to private sector assignments to escape being potentially incorrectly assessed as within IR35. There have been a number of reports of government projects being delayed as a result of these departures.
The Autumn Budget
The Autumn Budget Policy Paper reports that "Early indications are that public sector compliance is increasing as a result [of the reform of the off-payroll working rules for engagements in the public sector]". Perhaps recognising the importance of flexibility in the labour market, it cites the extension of the reforms to the private sector as "a possible next step". It adds that "It is right that the government take account of the needs of businesses and individuals who would implement any change" and that therefore the government "will carefully consult on how to tackle non-compliance in the private sector, drawing on the experience of the public sector reforms". Staffing companies should consider responding to the consultation document once it has been published and supporting the lobbying efforts of their trade association.
The Policy Paper also announced that the government will publish an employment status discussion paper as part of the response to Matthew Taylor's July review of modern working practices. The discussion document will explore the case and options for longer-term reform to clarify the employment status tests for employment rights and tax. However, reform of this nature does not seem imminent. This is particularly in light of recent press reports that government plans to announce this month whether they would introduce new legislation to reform employment practices in the gig economy have been delayed until next year. The delay is reported to be because of concerns that proposals to enhance workers' rights could be met with Parliamentary opposition from the far right of the Conservative party. In November, the Work and Pensions Committee and the Business, Energy and Industrial Strategy Committee published a joint report "A framework for modern employment" and draft Bill aimed at closing "loopholes that enable dubious business practices" such as the use of "bogus self-employed status as a route to cheap labour". The delay to the possible implementation of enhanced terms for gig workers was met with disappointment. This more joined up government approach to status, however, is welcomed by many.
What should staffing companies do now?
It seems likely that any new off-payroll working rules introduced for the private sector will be similar to those in place for the public sector and that they will be introduced in April 2019 or 2020. Staffing companies with public sector and private sector clients will be ahead of the curve if the public sector off-payroll rules are implemented in the private sector. Staffing companies with only private sector clients can learn from their experiences and start planning ahead.
Staffing companies with no or limited experience of the public sector off-payroll rules should anticipate having to work with their clients and contractors in order to make a full assessment of their contractor base and consider how to engage contractors going forward. Responses to the introduction of the public sector off-payroll rules included:
- Rate increases for business-critical contractors and lower fees for those who were not.
- The engagement of contractors as PAYE workers. This model brings with it increased compliance burdens in relation to social security benefits and certain employment law protection rights, such as the entitlement to paid holiday and the 48 hour weekly working time limit.
- The engagement of contractors via umbrella companies which employ them. Staffing companies significantly favoured this option over continuing to directly engage PSCs they assessed as being within IR35 or directly engaging contractors as PAYE workers. It is important that staffing companies only engage with accredited umbrella companies and avoid those with contractor offerings that sound too good to be true. Staffing companies face increasing exposure in this area, including under the Criminal Finances Act which in September introduced two new offences of failure to prevent the facilitation of tax evasion offences.
- "Margin only" contracts under which the end user client engages and pays the PSC directly and pays the staffing company its margin only. This moves IR35 liability to the end user client. It also makes the Agency Workers Regulations an irrelevant consideration because the "margin only" model takes PSCs completely out of scope. The downside to this model is that the staffing company potentially loses ownership of contractors. However, appropriately drafted restrictions in client contracts and, where the Conduct Regulations do not apply, in contractors' contracts can prevent this.
- Contracts for the full outsourced service rather than the provision of workers' services. This means that the public sector IR35 rules do not apply. Some staffing companies have built in-house expertise in the skills of the contractors whose services they supply and are able to contract with clients to provide these services. This has added burdens, such as increased liability exposure and insurance costs, but these should not be insurmountable.
- Project-based contracts: historically, contractors and clients have been reluctant to enter into project-based contracts rather than time and materials consultancy contracts. However, contracting on a project basis with fixed prices for the provision of pre-defined deliverables (with success fees for achieving milestones and project credits for failing to meet key performance indicators) is outside the scope of the public sector IR35 rules.
- Assignments that allow substitution of the contractor and substitution happens in practice
If the off-payroll rules are introduced in the private sector, staffing companies that brave the challenges and continue to engage and supply the services of PSC contractors will need to work with clients and contractors to assess status. They will need to decide how to do this. Options include:
- Making their own status assessment, possibly with guidance from advisers.
- Using HMRC's online CEST (check employment status for tax) tool. This has its deficiencies and is not suitable for some sectors.
- Outsourcing the IR35 status assessment to a third party provider, some of which provide an insurance-backed offering. These, however, must be scrutinised beyond the sales pitch to ensure that the written contracts properly reflect the offering.
Educating clients will be key, whichever route staffing companies decide to go. This will be a valuable investment of time: demonstrating an understanding of the off-payroll working rules should help retain client loyalty, whether or not the IR35 reforms are introduced in the private sector.