It’s been almost 20 years now since IR35 appeared in the 2000 Finance Act, which is a long time for HMRC to be fighting a losing battle against ‘disguised employment’.
With a similar approach having been declared a success in the Public Sector, HMRC hopes that the threat of liability passing up the supply chain to end hirers in the Private Sector will provide the ultimate deterrent and achieve success where a lack of resources has always impeded them in the past.
As always, legislation affecting the recruitment supply chain is an unwanted distraction and those affected seek a balance between compliance, commercial impact and shared responsibility. So what options should be considered?
How many contractors are affected?
Within the industry it’s estimated there could be up to 650,000 UK contractors operating through their own limited company – also known as Personal Service Company (PSCs) but published Government data is lower than this. These contractors pay themselves through a combination of a small salary and dividends which results in a net pay of around 80%, a compliant choice now (and in the future) when the role is outside of IR35. When employed and paid through a PAYE model the net pay is circa 65%, the outcome if deemed to be inside IR35.
The issue is clear, HMRC is chasing a tax gap of in that margin between 35% and 20% tax, plus the Employer NI lost whilst the contractors are not employed.
HMRC have estimated that by 2023 they would out of pocket by the sum of £1.3 billion if current behaviour continued.
How will the contingent supply chain react?
In the Public Sector, initial blanket determination of ‘inside IR35’ achieved HMRC’s objective but resulted in some contractors leaving for Private Sector roles. We then witnessed back pedalling by Public Sector bodies to prevent the loss of vital skill sets.
In the Private Sector the likes of Barclays, Lloyds and GSK have already taken steps to demand that contractors currently working through PSCs must move into a PAYE based arrangement (including umbrella) well before the April 2020 deadline. This is not the results of a blanket assessment of insider IR35, which might leave end hirers open to legal challenges, but is instead positioned as a new procurement policy. But the reality is that the end hirers have little confidence in their ability to efficiently and accurately assess and, if necessary, defend, a contractor’s ‘outside IR35’ status.
However, what about the contractors who believe they are genuinely in business for themselves and are working outside of IR35? They will resist being treated as an employee losing an additional 20% of take-home pay in tax. End hirers will either have to pay more for the services for these contractors or risk losing them. The alternative that may become more normal in the medium to long term is that end hirers will seek to engage closely with their agency partners, payroll providers and legal consultants that can undertake IR35 review with confidence.
What are the options for contractor engagement?
- Direct employment with either the end hirer or more likely a recruitment agency.
- Provides employment rights such as SSP, maternity/paternity and holiday pay.
- As contractors typically find work through a number of different agencies and work for a number of different end hirers, this often means there is no continuity in employment resulting it being harder for contractors to secure things like mortgages and loans.
- There is no fee to the contractor in this model.
- A popular and legitimate way which to engage and pay contractors and compliant providers offer many benefits to the entire supply chain.
- Contractor is employed by the umbrella company meaning they are able to work on numerous different assignments without changing employers and thus continuity of employment which helps with securing mortgages and loans.
- Umbrella is responsible for all employment risk including checking right to work.
- Many umbrellas also now provide an array of different benefits and perks such as employee rewards schemes. A margin is applied by the umbrella provider for services they provide reduces the net pay a contractor would get by going PAYE.
- Umbrella providers have unfairly been tarnished over the last few years due to the number of non-compliant providers operating in the sector, so it is however important to conduct due diligence to ensure that you are dealing with one the complies with UK tax and employment law. Picking the wrong umbrella is risk for transfer of debt to either the agency or end hirer.
Professional Employment Organisation (PEO)
- Established model in the US that is quickly being adopted in the UK.
- Employing, engaging and paying contractors has never been so complicated or burdensome and the PEO model mitigates all risk whilst enhancing contractor engagement.
- End hirer remains responsible for managing the worker on site but the PEO business becomes the employer of record (thus “joint” or “co-employment”).
- Contractor receives a simple PAYE payslip removing the confusion sometimes associated with an umbrella payslip.
- No cost to the contractor, and they enjoy all the benefits of being employed plus (often) substantial employee reward schemes – best of both worlds.
- Option for construction professionals who are not under Supervision, Direction or Control.
- Over the last two years there has an increased appetite to allow contractors to be paid through CIS and we expect this to increase after April 2020.
- Contractors have a standard 20% deduction for CIS and can claim tax relief on certain expenses in their self-assessment.
- Providers deduct a margin to cover the compliance and payroll administration.
The team at Compass have over 15 years’ experience dealing with employment status and offer umbrella, self-employment and PEO contractor employment and engagement solutions. If you would like some advice on your supply chain, with no commitment, we would be delighted to help with that.
Call us on 03333 66 00 28