Planned IR35 changes confirmed in 2018 Budget

Posted by David on October 30, 2018
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Earlier in 2018 the government consulted on whether to alter the so called ‘IR35 rules, in effect whether to transfer the IR35 obligations from the hired Personal Service Company (PSC) to the hirer of the service.

These extended rules were first introduced in April 2017, though at that time the changes applied only to hirers in the Public Sector. However the latest Budget 2018 documentation confirms that the new rules will be extended to the Private Sector, from April 2020.

Make no mistake this is a very significant switch in responsibility. Whilst the latest information suggests that the precise nature of the changes will themselves be subject to consultation (including perhaps exclusion of ‘small businesses’ from applying the new rules), at this stage it is fair to assume the new Private Sector obligations will mirror the Public Sector equivalent. This will mean:

  • The body hiring the PSC and worker has to make a decision whether the particular contract is ‘caught’ within IR35. In short, the hirer must decide would the worker be their employee if the PSC had not been used. Employment status is of course a very complex employment case law test, which requires a full understanding of how the contract will operate practically (simply agreeing robust written terms will not be enough in itself).
  • If the contract is caught, the body paying the PSC must deduct and account for PAYE and NIC before it pays the PSC. If the hirer pays though an intermediary agency or employment business etc., the hirer must inform the intermediary agency of the PAYE/NIC obligation.
  • Apart from the extra cost to the hirer (e.g. the employer’s NIC cost) the practicalities of deducting PAYE/NIC at the same time as paying a limited company, which may have other obligations e.g. VAT payment, may mean that specialist software is needed.

What can be done?

We admit there is unlikely to be a ‘one size fits all’ solution that we can dust off the shelf. However the announced timescale and promised HMRC guidance should ensure that, with very careful planning and a flexible approach, any increases in outgoings can be managed.

Please contact ET4B if you would like to discuss this further.

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ET4Bs Spring 2017 Newsletter

Posted by David on March 04, 2017
Flexible Benefits, HMRC, News articles, Status / Comments Off on ET4Bs Spring 2017 Newsletter

ET4Bs Spring 2017 Newsletter includes updates on new legislation applicable to salary sacrifice and flexible benefits (or ‘Optional Remuneration Arrangements’ to use the latest terminology), as well as changes to ‘IR35’ obligations in the Public Sector and a range of other employment related updates.

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IR35 obligations where personal services are provided to Public Authority clients

Posted by David on February 28, 2017
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There will be new ‘IR35’ rules to consider from 6 April 2017, where individuals provide their personal services to a Public Authority client via their own Personal Service Company (PSC). The planned changes apply for all payments made on or after 6 April 2017, whether or not the service etc was provided before that date.

The new obligations may be summarised as follows:

–           Firstly it is essential to decide whether the contract falls within the new rules, i.e. is the contractor supplying their services to a Public Authority client, as opposed to someone else (not always easy to tell, especially if there is a chain of contracts), and are they providing a personal service in doing so? NB: the stated definition of a Public Authority body is one which is required to respond to ‘Freedom of Information’ requests, but many smaller or subsidiary bodies are not actually sure if this applies to them.

–           If so, then the Public Authority client must make a decision whether or not ‘IR35’ applies i.e. would the worker be their own employee if none of the other ‘intermediary’ structures existed in the engagement chain?

–           If IR35 applies, the Public Authority must either withhold PAYE/NIC in full (accounting for this under RTI) or inform anyone else paying the PSC, in order that the payer may itself observe that obligation (the latter may apply if payments are routed through an employment business or agency to the PSC).

In making decisions on IR35 matters, HMRC expects the Public Authority to be able to rely on its new online digital status tool (which seems highly optimistic given that the tool was only made public by HMRC on 2 March, and there have been many signs in the ‘beta testing’ phase that the tool lacks robustness ). Whilst this digital HMRC tool may ultimately prove to be a useful guide, the distinction between employed and self-employed status remains a non-statutory test, so an effective working knowledge of employment case law is likely to be required.

This in itself assumes that the Public Authority will know enough about how the contract operates in order to make these decisions. Whilst HMRC insists that the IR35 rules are not being tightened fundamentally, all those in the contractual chain will need to have an operational understanding on these new procedures, as well as effective exchanges of information, to avoid PAYE/NIC simply having to be operated ‘by default’. This would inevitably cause upward pressures on the costs of the contract, if only for the fact that employer’s NIC would be due from the payer.

The most recent HMRC guidance also says that if the worker does not provide their services via a PSC, then the new rules don’t apply. Perhaps misleadingly, this guidance omits to say that more onerous obligations apply if the payer is a non-compliant Managed Service Company (MSC). In practice it may be very difficult to distinguish between a PSC, a compliant ‘umbrella’ payroll, and a non-compliant MSC, so specialist advice may be needed in cases of doubt.

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What is a Managed Service Company and why do you need to know?

Posted by David on December 31, 2016
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Can you spot the difference between a Managed Service Company (MSC) and a Personal Service Company (PSC)? If not, you may be subject to not only reputational, but also financial risks.

We suspect many hirers of labour feel little incentive to try to understand how their temporary workers (if engaged through an ‘agency’) are actually paid, or how any contractors’ business operates. However, when undertaking Employer Compliance Reviews (sometimes using the euphemism of ‘Know Your Customer’) we do now see HMRC expecting the hirer or ‘Client’ to take an active role in policing the arrangements. A recent Tax Tribunal decision has also now brought this matter into sharper focus.

In fact it can be very difficult to identify the difference between a legitimate intermediary e.g. an employment agency which makes payment to contractors via different (authentic) routes including PSCs, and the riskier type of operation which perhaps offers the contractor an off the shelf ‘complete payment solution’ albeit where the worker is also paid by ‘their own’ limited company.

If the contractor trades through a PSC, they can expect to be subject to the IR35 considerations. In short the IR35 rules say that if the worker would be an employee of the hirer but for the interposition of the PSC, then the PSC must account for PAYE/NIC on nearly all the income from that contract (NB: if they supply their services to a Public Authority client then, under new rules which apply from 6 April 2017, the Public Authority must take that IR35 decision, with tax/NIC being withheld from the PSC at source).

Whilst application of the IR35 rules appear to be in a constant state of flux, the advantage from the hirer’s perspective is that (outside of the Public Sector) these rules must be considered solely by the contractor company rather than the hirer.

MSCs on the other hand are potentially much more troublesome. They tend to be run by organisations and individuals who are not risking significant capital; hence these businesses can be ‘folded’ in the event of any significant HMRC enquiries (and they often are). If this happens, MSC rules indicate that any unpaid PAYE/ NIC duties may then be transferred further ‘up the supply chain’ to any other person or business who has encouraged or been actively involved in the MSC arrangements. Thus any attempt by the hirer to ‘shoehorn’ workers through a particular agency etc engagement route (perhaps based on a lower cost margin charged by that agency etc) could be seen as ‘encouragement’, and if so this becomes a PAYE/NIC risk for the hirer.

Although the MSC rules were introduced to significant fanfare back in 2007, little has been heard of these since, so there may be a temptation to think that the legislation has been forgotten about. However a recently published Tax Tribunal decision (involving Christianuyi Limited and others v HMRC, TC05045) indicates that HMRC is indeed taking a more robust approach. The case has only proceeded to the First Tier Tribunal and therefore does not yet constitute legal precedent, however it gives a good indication of how HMRC is likely to perceive the difference between a compliant and a non-compliant business.

We can therefore expect to see some further publicity from HMRC over the coming months, as they seek to gain traction from this (perhaps belated) Tribunal success. As a first step, on 7 November 2016 HMRC issued some guidance entitled ‘Use of Labour Providers‘. This was HMRC’s suggestion of a ‘due diligence’ approach which end-users or hirers of workers’ services ought to adopt. This guidance included reference to various statutory obligations, mixed in with a number of ‘recommendations’ (the latter may reflect ‘best practice’ in HMRC’s eyes, but these are non-statutory and may not always be achieved by the hirer, realistically). Nonetheless the document is an accurate reflection of HMRC’s intention to challenge non-compliant payment arrangements, including those offered by some Managed Service providers.

So what do you need to do? If the end-user client makes payment via a reputable employment business or agency, then the agency is likely to be first in the firing line (i.e. because the it is the agency rather than the end-user client which will then decide whether to engage with any ‘MSC’). However the business which hires the worker should also be aware of the distinctions. Often there will be several contractual layers in the engagement chain, and it is difficult to know how temporary workers are actually being paid. At the very least the hirer or Client will not wish to be tainted by association, with potentially negative publicity and reputational damage if it were to appear that they have (at best) acquiesced to large numbers of their workers being paid via non-compliant methods.

For any organisation seeking to persuade HMRC that the MSC legislation is not in point, it would be very useful to be able to show that any ‘PSC’ maintains full control of its own company bank account. This would include paying its own VAT and Corporation Tax bills as they become due, rather than a third party merely deducting these sums as a percentage of total contractual income. The PSC should also take personalised decisions on how each director and/or shareholder is to be paid or rewarded (rather than following a prescribed ‘off the shelf’ payment methodology).

Engaging a third party adviser to help with the mechanics of running a PSC should not be a problem so long as bespoke advice is given and the adviser’s fees are not set as a regular proportion of the income from the contract.

If you would like any assistance in this complex area please of course contact us.


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Travel and subsistence deductions – for agency and other workers paid through intermediaries

Posted by David on December 15, 2015
Expenses and benefits, HMRC, News articles, Status / Comments Off on Travel and subsistence deductions – for agency and other workers paid through intermediaries

On 9 December 2015 HMRC published its detailed proposals and draft PAYE legislation (with equivalent NIC legislation to follow), which would place significant limits on expenses claims made by workers paid though employment agencies and similar structures. The proposals are expected to take effect from 6 April 2016.

How does the new legislation work?
In principle the change is disarmingly simple, and will now deem that each engagement of the worker, by the employment agency etc., is regarded as a separate employment.

Since 1998, legislation has deemed that if substantially the whole period of an employment is performed at a single place, then any travel (i.e. from home or another private location) in order to get to or from that place, is ‘ordinary commuting’ i.e. non-allowable.

However employment agencies have often argued that a worker, albeit ‘moved’ from one period/place of client engagement to another period/place, is employed on a single overarching contract of employment by the agency. If this argument succeeds, substantially all of the employment is not performed at a single place and hence any such travel to reach that place is to a ‘temporary’ rather than permanent workplace i.e. an allowable journey. The new legislation therefore expects to defeat this argument, by ensuring that each client engagement will be considered separately as if it was a stand-alone employment.

It is HMRC’s view that some workers of employment businesses are currently able to enjoy ‘unfair’ tax deductions. Also it is perceived that in many such cases the ’employer’ (or paying business) retains most of the benefit of this. Indeed it seems HMRC may possibly regard many ‘umbrella payrolls’ as adding little or no true commercial value, beyond generating income for themselves at the expense of the Exchequer (i.e. typically by charging a fee to the worker in return for arranging payment of ‘tax free’ expenses). The new legislation therefore seeks to remove any such perceived unfair tax/NIC advantages.

Which workers will be caught under the new legislation?
As a minimum:
– An individual (worker) must personally provide services. There will be some situations where personal services are demonstrably not provided; however it will be assumed most agency workers do provide their services personally, and the onus would be the parties if they wish to show that this test is not met.
– The personal services must be supplied to another person (the client).
– However any direct contract between the client and the worker would be excluded, hence the arrangement must involve an ’employment intermediary’ (such as an employment business or agency) being contractually placed between worker and client.
– The new rules do not however apply if the manner in which the worker provides the services is not subject to (or to the right of) supervision, direction or control, i.e. by any person. HMRC is known to interpret these tests both widely and stringently, and again it must be assumed the onus would be very much on the parties to prove that this test is not met.
– Work undertaken wholly within the client’s home is also excluded (this is a factual test).

One chink of light is that the draft guidance does accept that secondment of a worker from one place to another within the same engagement would potentially still be regarded as a move to a temporary workplace (assuming that secondment was for 2 years or less). Whilst there may be certain limited circumstances where this exception might apply, we imagine it would be difficult for an agency to ‘manipulate’ the length of a particular engagement in order to seek to take advantage of the ‘relaxation’. In practice most engagement periods are for a finite period and are determined by factors outside the employment agency’s control i.e. they are based on the client’s requirement primarily.

What about Personal Service Companies (PSCs)?
PSCs are themselves an ’employment intermediary’, and hence the worker supplied by the PSC is also potentially caught under the rules. However the draft legislation confirms the Government’s intention, as outlined in the Chancellor’s recent Autumn 2015 statement, that the PSC will have to be within ‘IR35’ to also be caught within these new travel restrictions.

In simple terms the ‘IR35’ legislation applies if the worker would be an employee of the client but for the interposition of the PSC. At present the large majority of PSCs regard their contracts as outside of IR35 and, if this is correct, then the PSC will not be caught by the new restrictions. However HMRC is currently considering consultation responses on the extent to which the IR35 rules should themselves be overhauled. Whilst HMRC sources have recently indicated that no hard and fast decisions (on IR35 changes) have yet been made, it is very much a question of ‘watching this space’.

As a PSC structure will only have to consider the new travel rules if they are also caught by IR35, another potential stumbling block is how precisely to define a PSC? In most cases a PSC will be self-evident i.e. a company owned and run by one man or woman; however for instance the structure and ownership of jointly run businesses may have to be looked at more carefully. In general the IR35 legislation (Section 48 et. seq. of Income Tax (Earnings and Pensions) Act 2003), is drawn widely to include as many businesses as possible within its definition of a PSC for this purpose. However paradoxically, in the context of the new legislation, IR35 may prove to be an excluding factor, i.e. if you are defined as a PSC but are outside of IR35, you are also outside of the new travel rules.

When might the new proposed ‘transfers of debt’ rules apply?
In common with other ‘anti-avoidance’ legislation, the new rules propose that unpaid PAYE debts can be transferred to other relevant parties. This follows a pattern initially established with the 2006 rules applicable to ‘Managed Service Companies’, as well as the 2014 legislation seeking to prevent the payment of agency workers on a ‘falsely self-employed’ basis, or being paid via ‘offshore’ companies where work has been undertaken in the UK. Briefly the new transfers of debt proposals are that:
-PAYE/NIC due on any taxable travel expenses would in the first instance be sought from the employment intermediary which paid those expenses.
– However if those duties remain unpaid, the debts may be transferred to any director of that employment intermediary, by means of serving a ‘personal liability notice’.
– As mentioned, if the IR35 rules apply to a PSC then so will the new travel rules. If in this event the PSC fails to account for the PAYE/NIC on taxable travel expenses, the debts may be transferred to the director(s) of the PSC. Presumably such a PSC may have also failed to recognise and properly apply the IR35 rules themselves; hence the business will face a challenge on more than one front.
– If there is evidence that a ‘client’ (i.e. the end user of the worker’s services) has fraudulently colluded with the intermediary i.e. by providing false evidence that the worker is not subject to supervision, direction or control, then debts may be transferred to the client (and in turn, the client’s directors if the debts remain unpaid). Whilst in practice a client will no doubt wish to determine the actual extent of supervision, direction or control of each worker, on an individual basis, under the new regime they would be unwise to share that process (formally or informally) with the Agency without extreme caution.

If you require any further information on these proposals, or indeed other ’employment intermediary’ obligations including the proposed IR35 overhaul, please contact ET4B.

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New agency withholding and reporting rules – a further update

Posted by David on March 10, 2015
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At ET4B (and sad though it seems) we have been ‘eagerly’ anticipating some updates and clarification from HMRC in respect of the new withholding and reporting obligations for employment intermediaries (i.e. employment businesses or agencies). It is only very recently that the final reporting Regulations have been published.

Our overall impression remains that HMRC still hasn’t done enough to clarify its interpretation in some areas, particularly as regards how the rules may affect Personal Service Companies (PSCs). Anyway, our current understanding of the new withholding and reporting rules (insofar as they affect most UK agencies), can be briefly summarised as follows:

– There has to be client involved, which in turn pays an intermediary for the service (i.e. if the agency simply hires and pays for a service itself without passing the costs to a client, this payment would be outside the new rules).
– Also an individual (worker) must personally provide services to the client.
– If these tests are satisfied, the agency must apply PAYE/NIC on all worker payments, unless it can be shown that either:

  • The manner in which the worker provides the services is not subject to (or to the right of) supervision, direction or control, by any person (this is a very difficult test to meet), or:
  • That any remuneration receivable by the worker already constitutes employment income. HMRC would generally accept payments made to a bona fide UK PSC falls within this second exception.

– Payments which fall within either of the previous two exceptions must then be included within the new quarterly reports, which are to apply from 06/04/15.

HMRC has now confirmed that PSCs would be expected to be included within the quarterly reports issued by the ‘first tier’ intermediary employment business, and this does raise some concerns. We do feel that HMRC has been somewhat disingenuous in its earlier statements here. HMRC had stated consistently that PSCs were not the direct target, whilst introduction of the additional legislation was being discussed. The new quarterly reports will now inevitably provide HMRC with a rich vein of additional data with which to consider each PSC’s IR35 compliance position (i.e. this assumes there is no PAYE/NIC failure for the agency, which itself is not absolutely clear given the limited guidance issued by HMRC).

What do ‘first tier’ agencies have to do now?
We would suggest that employment businesses i.e. those that are the ‘first tier’ below the client in any engagement chain, would need to:

  • Review their contractor take-on processes, ensuring that what is and what isn’t a PSC is recognised fully (if the organisation is not a genuine PSC, there may be not just a reporting obligation, but a PAYE/NIC withholding obligation as mentioned above). This represents a challenge because, amongst other things, HMRC has not clarified fully what it regards as a genuine PSC.
  • If the contractor is not a PSC (e.g. it is an umbrella payroll) a full and robust review of the payment processes adopted by that organisation (including any subsequent contractor in the engagement chain) would be warranted. This is because, if the ‘umbrella’ etc. defaults on its obligations and doesn’t account for PAYE/NIC, the first tier agency will now be liable under the new rules.
  • Include the payments to PSCs (and any other payees e.g. umbrella payrolls) in the new quarterly returns.  These returns are expected electronically, and the latest template supplied for these reports is available on the HMRC website.
  • Recognise the additional IR35 risk to the contractor that the new quarterly reporting obligations may present. Any other factors which can therefore be introduced or clarified to create reduced IR35 risk for a PSC may help to allay contractor concerns.

What do clients and service end-users have to do?
Most of the obligations under the new rules would be placed on the first tier agency. However as a minimum the hirer of the service should review contracts with those agencies, e.g. to ensure that the agency is contractually required to hire and pay the worker (i.e. so that the agency will clearly have the obligation under the new rules). If there is no agency involved then the hirer would itself have to undertake a proactive ‘due diligence’ approach when taking on any new contractor. Amongst other things the hirer would want to be comfortable that all parties being hired are UK registered business. There must be no suggestion of the payee (or indeed anyone lower down in the contractual chain) being based overseas (and perhaps paying workers offshore for work performed in the UK).

In summary, the new rules do present a substantial additional compliance burden, primarily for agencies but also potentially for hiring organisations. We do not feel HMRC has helped here, i.e. the department has failed to provide sufficient and clear enough advice which would assist fully compliant businesses.

Although genuine UK-based PSCs are unlikely to create direct PAYE/NIC obligation for the hirer or the agency, once PSC contractors become fully aware of any potential increased IR35 risk to their own business, we can expect additional focus on those IR35 obligations. If you require assistance in these complex matters, e.g. in reviewing contractor take-on processes and policies, or reviewing actual contractual terms and working practices (i.e. not just written contracts) in order to minimise these IR35 risks more effectively, please of course contact ET4B.


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