The new IR35 regime is in force from 6 April 2021, bringing substantial new risk for staffing companies, consultancies and end hirers of personal service companies (PSCs). Here are seven key tips:
It is often not clear who the end client is, particularly where consultancies are involved. This is important because it is the end client who needs to issue a status determination statement (SDS). If in doubt, issue one, making sure that it clarifies who you are issuing it for and why.
If you have the correct process for terminating contracts and issuing new contracts for new projects then the old rate should be irrelevant and whatever new contract is issued is a new contract at a new rate. However, in certain cases if contractors can prove that they were in some way forced in the past to use a PSC model without really knowing what they were agreeing to they may be able to claim unlawful deduction from wages. You should take legal advice to minimise risk in this area if you think claims may arise – recent reports in the media suggest that class actions on behalf of contractors are being considered so this is an area to be watched. Remember that in most cases, a determination of inside IR35 will mean that the contractor will no longer contract through their PSC so this will require a different contract in any event.
Provision of tax insurance to organisations in the contract chain is one of the things specified in the 2006 managed service company (MSC) tax avoidance legislation as potentially triggering liability under that regime. Any organisation seeking to benefit from these services should take legal advice on the potential impact of the MSC legislation (and, in particular, ITEPA 2003 ss 61B, 61C and s 688A), and structure their use of external checking services carefully to minimise this risk. Some external checking services will be good, but some (especially some of the insurance-backed arrangements we have seen in the market over the last year) may create more risk than they solve in an era when HMRC is likely to become increasingly interested in collecting tax from wherever it can.
No. It can affect direct engagement of PSCs by end clients and, where the arrangements are time and materials rather than output-based, via consultancies and some digital platforms. Use of consultancies in particular needs to be carefully reviewed by end clients. Many consultancies are aware of this and taking steps to ensure compliance, but others are not yet ready.
In some cases, if the models are operated correctly, IR35 will not apply. But don’t expect the model to solve IR35 problems just by issuing a contract which says ‘statement of work’. Genuine statement of work is a different business model to staffing: it involves the supply of scoped deliverables, rather than time and people.
Use of umbrellas is understandable. Many have built very efficient payroll systems. However, there can be serious risks. HMRC’s Spotlight 54 highlighted use by some umbrella companies of offshore loan scheme arrangements to pay workers who returned to the NHS to help with covid. And there have been media reports about use of small umbrella schemes with offshore directors to avoid employer’s NICs in relation to workers engaged to do covid tests. Some (but by no means all) umbrellas undoubtedly operate risky schemes. Some of these schemes may be deemed to involve attempts to deceive HMRC and as such may well involve criminal tax evasion. If the schemes are deemed criminal, any staffing company or end user that directly or indirectly uses staff engaged under such models may face unlimited fines under the Criminal Finances Act 2017. If there is just unlawful avoidance falling short of criminal tax evasion, liability can jump up the chain under the ‘enabling’ legislation of 2017 and other anti-avoidance measures.
Therefore businesses which are now using or about to use a lot more umbrella companies following IR35 should assume that at least some of their contractors will be seduced into these risky schemes and should carry out checks on their supply chains to make sure tax is being properly administered and that there are no rogue operators in the chain. It is not enough to rely on an accreditation, or membership of a trade association, as proof that an umbrella is safe, albeit such membership and accreditation can be a helpful sign. There is no statutory approval scheme for umbrellas, so you will need to do your own spot checks on how workers are paid. Beware those which appear to offer unfeasible tax savings to former PSC contractors and/or do not cooperate when you carry out checks.
Does that mean all risk of IR35 liability for PSCs they use passes down the chain? No. HMRC has made it clear that if the ‘fee payer’ which the end client expects to pay the relevant tax then fails to do so (other than as a result of insolvency for blameless reasons), the IR35 liability can bounce back up the chain to the end client. HMRC drily observes that end clients should choose suppliers with care, and expects checks to be carried out on the supply chain. Clearly end clients would be unwise to pick suppliers just because they are cheap. And indemnities from many types of supplier are unlikely to be much use because they will be unlikely (except in the case of the largest) to have the balance sheet strength to pay any indemnity claims in a class action type IR35 claim, and the insurance arrangements many have in place may not pay out for certain types of claim – which is why HMRC expects companies to check the compliance of their supply chains.
The new IR35 regime is in force from 6 April 2021, bringing substantial new risk for staffing companies, consultancies and end hirers of personal service companies (PSCs). Here are seven key tips:
It is often not clear who the end client is, particularly where consultancies are involved. This is important because it is the end client who needs to issue a status determination statement (SDS). If in doubt, issue one, making sure that it clarifies who you are issuing it for and why.
If you have the correct process for terminating contracts and issuing new contracts for new projects then the old rate should be irrelevant and whatever new contract is issued is a new contract at a new rate. However, in certain cases if contractors can prove that they were in some way forced in the past to use a PSC model without really knowing what they were agreeing to they may be able to claim unlawful deduction from wages. You should take legal advice to minimise risk in this area if you think claims may arise – recent reports in the media suggest that class actions on behalf of contractors are being considered so this is an area to be watched. Remember that in most cases, a determination of inside IR35 will mean that the contractor will no longer contract through their PSC so this will require a different contract in any event.
Provision of tax insurance to organisations in the contract chain is one of the things specified in the 2006 managed service company (MSC) tax avoidance legislation as potentially triggering liability under that regime. Any organisation seeking to benefit from these services should take legal advice on the potential impact of the MSC legislation (and, in particular, ITEPA 2003 ss 61B, 61C and s 688A), and structure their use of external checking services carefully to minimise this risk. Some external checking services will be good, but some (especially some of the insurance-backed arrangements we have seen in the market over the last year) may create more risk than they solve in an era when HMRC is likely to become increasingly interested in collecting tax from wherever it can.
No. It can affect direct engagement of PSCs by end clients and, where the arrangements are time and materials rather than output-based, via consultancies and some digital platforms. Use of consultancies in particular needs to be carefully reviewed by end clients. Many consultancies are aware of this and taking steps to ensure compliance, but others are not yet ready.
In some cases, if the models are operated correctly, IR35 will not apply. But don’t expect the model to solve IR35 problems just by issuing a contract which says ‘statement of work’. Genuine statement of work is a different business model to staffing: it involves the supply of scoped deliverables, rather than time and people.
Use of umbrellas is understandable. Many have built very efficient payroll systems. However, there can be serious risks. HMRC’s Spotlight 54 highlighted use by some umbrella companies of offshore loan scheme arrangements to pay workers who returned to the NHS to help with covid. And there have been media reports about use of small umbrella schemes with offshore directors to avoid employer’s NICs in relation to workers engaged to do covid tests. Some (but by no means all) umbrellas undoubtedly operate risky schemes. Some of these schemes may be deemed to involve attempts to deceive HMRC and as such may well involve criminal tax evasion. If the schemes are deemed criminal, any staffing company or end user that directly or indirectly uses staff engaged under such models may face unlimited fines under the Criminal Finances Act 2017. If there is just unlawful avoidance falling short of criminal tax evasion, liability can jump up the chain under the ‘enabling’ legislation of 2017 and other anti-avoidance measures.
Therefore businesses which are now using or about to use a lot more umbrella companies following IR35 should assume that at least some of their contractors will be seduced into these risky schemes and should carry out checks on their supply chains to make sure tax is being properly administered and that there are no rogue operators in the chain. It is not enough to rely on an accreditation, or membership of a trade association, as proof that an umbrella is safe, albeit such membership and accreditation can be a helpful sign. There is no statutory approval scheme for umbrellas, so you will need to do your own spot checks on how workers are paid. Beware those which appear to offer unfeasible tax savings to former PSC contractors and/or do not cooperate when you carry out checks.
Does that mean all risk of IR35 liability for PSCs they use passes down the chain? No. HMRC has made it clear that if the ‘fee payer’ which the end client expects to pay the relevant tax then fails to do so (other than as a result of insolvency for blameless reasons), the IR35 liability can bounce back up the chain to the end client. HMRC drily observes that end clients should choose suppliers with care, and expects checks to be carried out on the supply chain. Clearly end clients would be unwise to pick suppliers just because they are cheap. And indemnities from many types of supplier are unlikely to be much use because they will be unlikely (except in the case of the largest) to have the balance sheet strength to pay any indemnity claims in a class action type IR35 claim, and the insurance arrangements many have in place may not pay out for certain types of claim – which is why HMRC expects companies to check the compliance of their supply chains.
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