The government is currently consulting on "the best way to tackle non-compliance with the off-payroll working rules (IR35) in the private sector". It seems likely that new IR35 legislation, similar to that introduced for the public sector in 2017, will come into effect from April next year. Staffing companies that supply into the private sector should consider responding to the consultation, which closes on 10 August 2018, and start planning ahead for next April.
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 ("NICs") from the fees it pays for the PSC contractor's services and for paying employer's NICs. 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 contractor as their employee if they engaged the individual directly. They are required to take reasonable care in coming to their conclusion on employment status. If a public authority fails to inform a staffing company of its conclusion on a contractor's status or fails to take reasonable care in coming to its conclusion, there is a risk that any liability to pay tax and NICs transfers from the staffing company to the public authority.
Now the government wants to roll out the public sector IR35 rules to the private sector.
The consultation document makes a number of suggestions for the reform of the IR35 rules for off-payroll working in the private sector. These are:
- Extending the public sector reform to the private sector.
- Encouraging, or requiring, businesses to help ensure that off-payroll workers provided to them through their labour supply chains are complying with the existing private sector off-payroll working rules.
- Maintaining the existing private sector off-payroll working rules and placing additional record keeping obligations on end user clients.
It also asks for suggestions for other options to tackle non-compliance with the private sector IR35 rules, although it excludes several suggestions made in response to previous consultations on the off-payroll working rules.
However, it is clear that the favoured option is to introduce new rules similar to the public sector rules. The consultation document cites this as "the lead option". If the government goes ahead with this option, it could possibly be with some additional more stringent requirements including:
- Sanctions imposed on staffing companies which disregard an end user client's conclusion that a contractor is a deemed employee and decide that a contractor is outside IR35. This suggested "improvement" should be strongly resisted by staffing companies which should, as the tax payers, seek to retain control over how they assess their own tax liabilities.
- Penalties imposed on contractors or PSCs who knowingly receive income from which the correct amount of tax and NICs has not been deducted.
What should staffing companies do now?
Staffing companies should consider responding to the consultation or contributing to a trade association's response before the 10 August 2018 deadline. It is important that the staffing industry's views are heard. Although it seems that a decision on the way forward has probably already been made, there is still an opportunity to influence the outcome.
If the public sector off-payroll working rules are implemented in the private sector, staffing companies with public and private sector clients will have an advantage over those that only have private sector clients. However, staffing companies that only supply into the private sector can learn from their experiences and those of their advisers and start planning ahead.
Staffing companies which supply into the private sector and have no or limited experience of the public sector off-payroll rules should consider actioning the following:
- Assigning a team to educate themselves and the business on the new rules and take responsibility for planning for the implementation of the new rules.
- Working with clients and contractors to educate them on the new rules before they come into force, making sure that they are aware of their obligations and ensuring in particular that clients understand that the legislation will not permit them to take a blanket approach to assessing status and simply decide to treat all contractors as being within IR35.
- Working with clients and contractors to make a full assessment of their contractor base and consider how to engage contractors going forward.
- Reviewing existing client and contractor contracts and varying them where necessary or entering into new ones.
- Anticipating the introduction of the new rules when tendering for new client contracts and factoring this in when negotiating and entering into new contracts.
When planning ahead, it is worth noting that the introduction of the public sector off-payroll working rules prompted the following:
- Rate increases for business-critical contractors and lower fees or termination of assignments for others.
- The engagement of contractors directly as PAYE workers. This model of engagement 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 take them on as employees. Staffing companies supplying into the public sector 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 risk exposure in this area, including under the Criminal Finances Act which last 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 and, for example, 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 with substitution occurring in practice.
If the public sector off-payroll working rules are introduced for the private sector, staffing companies that embrace the challenges and continue to engage and supply the services of PSC contractors will need to work with clients and contractors to assess IR35 status. They will need to decide how to do this. Options include:
- Making their own status assessments, possibly with guidance from advisers.
- Using HMRC's online CEST (check employment status for tax) tool. This tool has crucial deficiencies, including not testing for the key employment indicator of mutuality of obligation (the obligation on an employer to provide work and the obligation on an individual to accept that work), and is not suitable for assignments in 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.
Key to any reaction to this consultation and its likely outcome will be the ability of staffing companies to educate and work with their clients and contractors. Making sure that clients and contractors understand the off-payroll working rules and are not unsettled will be a valuable investment of time which should help smooth the process of transition and retain client and contractor loyalty.