The original legislation was created to ensure that contractors operating as ‘disguised employees’, were paying the correct amount of tax and NI by taxing them in a similar fashion to those who are employed.
As it became a popular route for contractors over the years, it also created a problem for HMRC because the decision of how the rules were applied rested solely on the contractor e.g. if they were a genuine contractor (outside IR35) or an employee (inside). Unsurprisingly, most contractors put themselves outside of IR35 and enjoyed greater tax benefits, something that HMRC disagreed with in many instances, but found hard to enforce against by having to target individual PSC’s every time they brought a case. The knock-on effect was that HMRC were not winning enough of the IR35 employment related cases which is why they have targeted the ‘upper chain’ in a move designed to have greater success and ‘self-policing’ of their policies.
Many recruiters will be aware of the changes that affected the public sector in 2017, and from 6 April 2021 the similar IR35 reforms to the private sector will come into effect, meaning that contractors will no longer hold the responsibility of determining their employment status on assignments.
The reforms give your clients the responsibility for carrying out IR35 assessments, which is easier said than done due to the additional work involved, but also the exposure to compliance risks.
Where the organisation engaging the PSC is medium or large the reforms to the private sector will see end hirers having to provide Status Determination Statements (SDS) to both the contractor and the first agency in the supply chain.
A new inclusion, the SDS declares a contractor’s employment status following an IR35 assessment and provides the reasoning behind the determination. This statement must be provided before the contract begins, and meet the basic criteria:
Of course, for those contractors assessed as being outside of IR35, there will be little change apart from maybe getting used to the new assessment process.
Because it is normally the recruiter who pays the contractor’s earnings to their limited Company, this will mean that any PSC’s who are assessed as being inside IR35 it will be the agency who has to complete the “deemed employment” calculation and make deductions for PAYE tax and NICs, including employers NI. This causes extra administration, potential costs, and headache for recruitment providers.
Following the reforms, where HMRC believe there is no realistic prospect of recovering the outstanding tax and NI from the fee-payer, which could be down to a disputed SDS, they could look to recover this from the end hirer. HMRC have stated that this will only be used where they believe a tax avoidance scheme has entered the supply chain.
This makes it of paramount importance that end hirers and recruiters work closely with each other to have a clear process of how they will engage contractors, and if engaging with PSC freelancers, which level of workers to assess, ensuring an SDS has been completed properly and keeping communication open throughout the chain.
A good exercise to complete in conjunction with the end hirer is to look at current contractor usage and what might need to change. This includes:
Although these new changes do not mean the end of contractors being engaged through PSC’s per se, it will no doubt reduce the number of Limited Contractors that clients feel comfortable assessing and engaging with, especially in certain sectors.
‘Blanket decisions’ by companies, whilst not popular to some, will become commonplace or there will simply be a removal of being offered a ‘Limited Company’ option when placements are presented. This is understandable due to the amount of new compliance and trust required throughout the contract chain. The end hirer will now have to work more closely with for example, an agency they recruit through, to assess the potential for Limited’s/PSC’s and/or help categorise where contractors should fall into other pay models. This will mean it becomes vital for the recruiters to be advising their clients early and with clarity on what the future of engaging with contractors looks like. This is also where working with a reputable umbrella provider could also make the difference
It’s not all doom and gloom. We realise the effort required to get everything in place can be overwhelming, but we are here to help with compliant contractor options as an alternative to the rigorous process that now surrounds the engaging of PSC’s.
At Orbital, we are not looking to provide third party services for IR35 assessments backed by insurance, we are concentrating on what we do best – simple self-employed and PAYE services for any level of worker in any industry. It is not a crime to be despondent about doing the whole status determination process, there are other alternatives that can be just as useful for your contractors, you, and your end clients:
If you would like to discuss how the options we have could be suitable for your temporary workers whilst also assisting your end clients with IR35 solutions, please drop us a line at: compliance@orbitalservices.co.uk or on the contact form below.
We can also keep you updated with any seminars/webinar events that we will also be hosting over the coming months.
The original legislation was created to ensure that contractors operating as ‘disguised employees’, were paying the correct amount of tax and NI by taxing them in a similar fashion to those who are employed.
As it became a popular route for contractors over the years, it also created a problem for HMRC because the decision of how the rules were applied rested solely on the contractor e.g. if they were a genuine contractor (outside IR35) or an employee (inside). Unsurprisingly, most contractors put themselves outside of IR35 and enjoyed greater tax benefits, something that HMRC disagreed with in many instances, but found hard to enforce against by having to target individual PSC’s every time they brought a case. The knock-on effect was that HMRC were not winning enough of the IR35 employment related cases which is why they have targeted the ‘upper chain’ in a move designed to have greater success and ‘self-policing’ of their policies.
Many recruiters will be aware of the changes that affected the public sector in 2017, and from 6 April 2021 the similar IR35 reforms to the private sector will come into effect, meaning that contractors will no longer hold the responsibility of determining their employment status on assignments.
The reforms give your clients the responsibility for carrying out IR35 assessments, which is easier said than done due to the additional work involved, but also the exposure to compliance risks.
Where the organisation engaging the PSC is medium or large the reforms to the private sector will see end hirers having to provide Status Determination Statements (SDS) to both the contractor and the first agency in the supply chain.
A new inclusion, the SDS declares a contractor’s employment status following an IR35 assessment and provides the reasoning behind the determination. This statement must be provided before the contract begins, and meet the basic criteria:
Of course, for those contractors assessed as being outside of IR35, there will be little change apart from maybe getting used to the new assessment process.
Because it is normally the recruiter who pays the contractor’s earnings to their limited Company, this will mean that any PSC’s who are assessed as being inside IR35 it will be the agency who has to complete the “deemed employment” calculation and make deductions for PAYE tax and NICs, including employers NI. This causes extra administration, potential costs, and headache for recruitment providers.
Following the reforms, where HMRC believe there is no realistic prospect of recovering the outstanding tax and NI from the fee-payer, which could be down to a disputed SDS, they could look to recover this from the end hirer. HMRC have stated that this will only be used where they believe a tax avoidance scheme has entered the supply chain.
This makes it of paramount importance that end hirers and recruiters work closely with each other to have a clear process of how they will engage contractors, and if engaging with PSC freelancers, which level of workers to assess, ensuring an SDS has been completed properly and keeping communication open throughout the chain.
A good exercise to complete in conjunction with the end hirer is to look at current contractor usage and what might need to change. This includes:
Although these new changes do not mean the end of contractors being engaged through PSC’s per se, it will no doubt reduce the number of Limited Contractors that clients feel comfortable assessing and engaging with, especially in certain sectors.
‘Blanket decisions’ by companies, whilst not popular to some, will become commonplace or there will simply be a removal of being offered a ‘Limited Company’ option when placements are presented. This is understandable due to the amount of new compliance and trust required throughout the contract chain. The end hirer will now have to work more closely with for example, an agency they recruit through, to assess the potential for Limited’s/PSC’s and/or help categorise where contractors should fall into other pay models. This will mean it becomes vital for the recruiters to be advising their clients early and with clarity on what the future of engaging with contractors looks like. This is also where working with a reputable umbrella provider could also make the difference
It’s not all doom and gloom. We realise the effort required to get everything in place can be overwhelming, but we are here to help with compliant contractor options as an alternative to the rigorous process that now surrounds the engaging of PSC’s.
At Orbital, we are not looking to provide third party services for IR35 assessments backed by insurance, we are concentrating on what we do best – simple self-employed and PAYE services for any level of worker in any industry. It is not a crime to be despondent about doing the whole status determination process, there are other alternatives that can be just as useful for your contractors, you, and your end clients:
If you would like to discuss how the options we have could be suitable for your temporary workers whilst also assisting your end clients with IR35 solutions, please drop us a line at: compliance@orbitalservices.co.uk or on the contact form below.
We can also keep you updated with any seminars/webinar events that we will also be hosting over the coming months.
