Off-Payrolling IR35 FAQ's & IR35 Status Indicators
As you will be aware the Off-Payroll rules in the private sector are due to take effect from the 06 April 2020. Unfortunately, there has been no further update from HMRC on the FINAL legislation. Updates from HMRC are expected from November 2019 onwards.
In the meantime, end user (clients) and agencies continue to use the DRAFT legislation (July 2019) as their main form of guidance.
End user clients are forging ahead focusing on their future strategy re contractor engagement beyond April 2020; with many already engaging with specialist firms carrying internal audits including working practices and status reviews.
Due to the nature of the rules, there is very little contractors can do at this moment; we appreciate that lack of clarity can be frustrating. The new Off-Payroll rules should not dissuade you from continuing with or taking on new assignments in the interim, and you should continue to manage your own payments and taxes until then.
Prodrill are working closely with its end user clients to understand their processes and application of the rules.
We continue to work in partnership with QDOS CONTRACTOR as our compliance partner and we will continue to provide updates as and when they are available.
In the meantime, we have prepared below some commonly asked questions to help you understand more, as well as some key IR35 Status Indicators for tax purposes.
We also recommend that you continue to become knowledgeable about how the changes could affect your PSC. There is a very good helpful guide prepared by our partners QDOS, which you can read here:
Off-Payroll Rules in the private sector (IR35) - FAQs for contractors
New laws come into force on 06 April 2020 that will impact any contractors who provide services via a limited company or personal service company (PSC) to any medium or large private sector company (whether directly or via an agency).
Prodrill want to reassure you that we are very much aware of the future legislation and we understand what the changes may mean for our contractors. We are working closely with all our end user clients to give you relevant updates as often and as early as possible.
For those who have not yet heard about the announced Off-Payroll Rules and IR35, we have provided some FAQs below:
What will be different in the future?
The engager / end client becomes responsible for determining the tax status of the assignment for any PSCs they engage (whether directly or via an agency). This is in contrast to the current IR35 rules which requires a PSC contractor to determine his or her own tax status of any assignments.
What is IR35?
IR35 refers to HMRC’s ‘test’ for self-employment for tax purposes when contractors work via a PSC.
The rules state that a PSC contractor is not considered to be self-employed if the contractual clauses and/or working arrangements of the assignment indicate that the contractor would be considered an employee (for tax purposes only) if he/she had been engaged directly, with no PSC in the chain.
In those circumstances, the PSC contractor is determined to be ‘Inside IR35’ or ‘caught’ by the IR35 rules, and must pay income tax and National Insurance Contributions (NICs) on the entire assignment income, just as an employee would.
Where the working practices of the assignment indicate a truly self-employed engagement, the assignment is considered to be ‘Outside IR35’ and the PSC is entitled to treat the income differently (taking the income as dividends for example).
How is IR35 status determined?
The criteria that dictates what is ‘Inside IR35’ or ‘Outside IR35’ is not included in the IR35 legislation or the Off-Payroll Working rules. There is no statutory definition of what it means to be employed or self-employment for tax purposes, so there are no government-approved guidelines or checklists that companies can use.
Instead businesses will need to learn, understand and apply the outcomes from decades of tax tribunal hearings (court judgements) to flesh out the detail. The result of using case law to assess IR35 status is a complex, often highly subjective and case-specific ‘test’ that is difficult to interpret and operate. For more information about the factors to consider when deciding tax status, please see our IR35 Status Indicators. We have included an overview of the status indicators in a separate document for your information, but it is important to note that the factors must be considered and applied individually and as a whole.
What are the new Off-Payroll Rules?
The new rules will be broadly similar to the changes made in 2017 to public sector bodies engaging PSC contractors. We do not yet have final legislation from HMRC, but this is what we know so far.
From 06 April 2020, any medium or large company that uses PSC contractors, whether directly or through an agency, becomes legally responsible for assessing the IR35 status of each assignment. The liability for deciding whether an assignment is employed for tax purposes (‘Inside IR35’) or self-employed (‘Outside IR35’) therefore moves away from the contractor to the end user client.
The client must issue a ‘Status Determination Statement’ (SDS) confirming the IR35 status for each PSC contractor it engages, and include the reasons for the determination. The client will need to issue an SDS for all current contractors / assignments before 05 April 2020, and before the first day of an assignment for any future placements starting after 06 April 2020.
For any assignments deemed ‘Inside IR35’, Prodrill will be required to make appropriate deductions for income tax and NICs before making payment to the PSC on all payments from 06 April 2020 onwards.
What does this mean for me?
If you are a contractor being paid directly by Prodrill (as an agency PAYE worker) on or after 06 April 2020, these changes do not affect you.
If you are working via a PSC providing services to a ‘small’ (see Question 6) private sector company on or after 06 April 2020, then these changes do not affect you and the original IR35 rules will continue to apply, even when the new Off-Payroll Rules go live.
If you are working via a PSC and providing services to a medium or large private sector company on or after 06 April 2020, then these changes will impact you.
What is different for ‘small’ businesses?
The Off-Payroll Rules do not apply to PSC contractors providing services to small businesses. For PSC contractors delivering services to small businesses, the existing IR35 rules will continue to apply and you will remain responsible for your own tax determinations and IR35 status.
The definition of ‘small business’ for the purposes of the Off-Payroll Rules is rather complex depending on the type of incorporation., but for most clients it will be the same criteria as defined in the Companies Act: https://www.legislation.gov.uk/ukpga/2006/46/section/382.
We expect that most of the PSCs working via Prodrill will be affected by the new Off-Payroll Rules since the vast majority of our end clients are considered a medium or large company.
I work via a PSC under the Construction Industry Scheme (CIS) rules; am I exempted from these changes?
The new Off-Payroll Rules will take precedence over the CIS rules. Therefore, the Off-Payroll Rules will apply to you if you work via a PSC and your end client is not a small business (see Question 6).
When can I expect to be issued with a Status Determination Statement?
We are working closely with all our clients to encourage them to provide an SDS as soon as possible for all current assignments that are likely to extend past 06 April 2020. Once our clients have completed their tax status assessments and provide the SDS, we will pass it to you.
What happens if my assignment is determined to be ‘Inside IR35’ under the new rules?
Income tax and NICs become payable on the full assignment income for any payments we make to you after 06 April 2020. If you want to continue to work via your PSC, you will continue to be paid by Prodrill into your PSC bank account, but the amount that you receive will be reduced to take account of the taxes and NICs that we will be required by law to deduct from your pay rate.
We may need to agree new rates and contractual terms with you to account for additional statutory payments that Prodrill will need to make. Where that is the case, we will discuss the new arrangements with you so you can understand how your new rate has been calculated.
You may choose to stop using your PSC and engage directly with Prodrill as a PAYE contractor in which case we will need to agree a new assignment with you to reflect the new arrangements. Prodrill have an internal PAYE payroll function, headed up by our Accounts Manager - Aileen Cowie, who is an experienced financial professional and a member of the Chartered Institute of Payroll Professionals. Should there be a future requirement to operate as a PAYE contractor then Prodrill is well versed on PAYE statutory deductions.
If my assignment is determined to be Inside IR35, can my rate be increased to cover the difference in take-home pay?
Ultimately the decision about rate increases will come from our clients. Prodrill cannot increase your pay rate without a corresponding agreement from the client to increase the charge rate. Every client is likely to take a slightly different approach. As soon as the client has completed its IR35 assessments, and issued the SDS for each current contractor, we will be working with them to confirm the approach they will take with those contractors who are deemed Inside IR35 once the new rules take effect.
What happens if my assignment is determined to be ‘Outside IR35’ under the new rules?
Before 06 April 2020, Prodrill will issue you with an SDS from our client confirming that you are Outside IR35. After 06 April, we will continue to pay your PSC without any deductions for tax or NICs. Therefore, nothing will change in terms of how or what we pay your PSC, even after the new rules go live.
What happens next?
We urge all of our contractors to continue as normal for the moment. The existing IR35 rules continue to apply until 05 April 2020 and our clients are well aware of their legal obligation to make status determinations before the new rules take effect.
As soon as we know more about how the client you are providing services to intends to manage the new Off-Payroll Rules and is able to release an SDS for your assignment, we will be in touch. If you have any questions in the meantime, please speak to your dedicated Recruitment Consultant, on 01224 261920.
IR35 Status Indicators
The following are the main factors for determining tax status. They are not designed to be a definitive list, as the working arrangements of an assignment are generally taken ‘as a whole’ when assessing IR35 status.
The first 3 factors carry the most weighting but no one factor can determine IR35 status by itself, all of the factors should be considered.
Mutuality of Obligation
No obligation for client to offer and no obligation for PSC / worker to accept work.
Worker only undertakes work or services for which the PSC has been engaged.
No requirement for PSC / worker to work only for that client during assignment.
Worker is not under the supervision of client.
The manner in which the worker is performing services is relatively autonomous.
The worker is able to determine when, how and where he/she does the work.
PSC has an unfettered right of substitution. No indication that the worker him/herself is required to personally provide their services.
Director and Shareholder
Worker performing the services is a director and shareholder of the PSC (and entitled to take at least 5% of the dividends).
Any 'office-holder's role', meaning that the worker undertakes statutory responsibilities (company director, company secretary, board member), puts the assignment Inside IR35.
The client does not determine when and where the PSC undertakes the services (e.g. a specific working pattern, location of where work is performed).
Nature and length of the engagement
PSC is engaged for a finite period for specific task or project.
Pay and benefits
Worker is not entitled to overtime or any other benefits.
Worker is not treated in a similar manner as employees and does not provide the same type of work as permanent employees.
Worker is not entitled to use the client’s facilities (other than premises) or participate in any employee-related activities.
Worker is not entitled to make use of the client’s disciplinary or grievance procedures.
Equipment & Materials
PSC provides its own equipment, materials and/or own business premises. PSC pays for worker’s training and the costs are not reimbursed by the client.
PSC is responsible for any losses caused by its workers and required to correct any mistakes or complete unfinished work in its own time / at own expense.
PSC can be terminated by client at any time with no requirement for notice (or notice pay).
The worker actively promotes his/her PSC (advertising, social media, website).
PSC has appropriate business insurances in place to cover all assignments.
Should you wish to discuss any of the above please do not hesitate to contact us on +44 (0) 1224 261920.
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