The introduction of IR35 for the private sector brought employment status check requirements in line with existing rules for the public sector. Complying with this new responsibility for end-users to determine the employment status of off-payroll workers (OPWs) or contractors is complex, but one unnecessary challenge is the amount of assumptions about IR35 that are either completely or even partially false. Understanding the truth behind these myths avoids unnecessary confusion and makes compliance easier for organisations.
Since April 2021, all organisations except small private-sector businesses are in scope of the updated IR35 legislation.
When such an organisation is the end-user of the service of an individual operating via their personal service company (PSC) or similar intermediary, they must assess that individual’s status and provide them (and the agency/intermediary providing the individual, if applicable) with a Status Determination Statement (SDS). Failure to assess could mean the organisation is not demonstrating ‘reasonable care’ and could impact its wider IR35 and tax compliance.
Separate from IR35 and the recent changes, contractors engaging as sole-traders should also be assessed to ensure the engaging entity is treating them correctly for tax purposes.
If you’re the end user of services offered by individual’s PSC or similar intermediary, you must assess their IR35 status and provide them with an SDS.
If you’re not also their fee-payer then you must also give a copy of the SDS to the agency that engaged them, so that it can be passed on to the eventual fee-payer.
Failure to demonstrate this ‘reasonable care' could have consequences with respect to the wider IR35 and tax compliance of the organisation.
Where there is no PSC or similar intermediary in place and an individual is directly engaged as a sole-trader, it is also important to assess them in order to ensure it is appropriate to treat them as self-employed rather than employed. Again, this is also helpful from a wider tax compliance and governance perspective.
While there is some truth in the fact that an organisation does not need to assess individuals being provided as part of a genuine B2B composite service it receives, IR35 may still apply and formal assessment be necessary by the ‘end-client’, which may be the service provider in this case.
Sometimes it’s not clear who is the end-client. It will be necessary to consider various factors in order to confirm whether there is a genuine outsourced service, and this can be a complex area.
Crucially, an arrangement cannot simply be reclassified or rebadged as an outsourced service in order to avoid IR35. It’s instead necessary to look at the facts of the arrangement.
A fully outsourced service whereby an organisation is in receipt of a genuine B2B composite service by a service provider as opposed to the personal services of individuals, would give no obligation on that end user organisation to assess the individuals’ IR35 status.
However, there’s still an obligation for such individuals operating via a PSC or similar intermediary to be assessed. But this would be an obligation of the entity further down the contractual chain which is engaging with the individuals and their PSCs to effectively use their services in order to fulfil the outsourced service to their client.
IR35 may still apply and formal assessment is necessary, but the entity which is the ‘end-client’ of an individual’s service may have altered and sometimes it’s not clear who must perform this assessment. It will be necessary to consider various factors in order to confirm whether there is a genuine outsourced service, such as whether an organisation requests the services of specific individuals or has a right to ‘vet’ them. This can be a complex area whereby specialist advice may be required.
Crucially, an arrangement cannot simply be reclassified or badged as an outsourced service in order to avoid IR35. It’s instead necessary to look at the facts of the arrangement in order to determine whether IR35 would apply. This may include considering which entity would be considered the ‘end-client’ and would have the obligation to assess, and which entity (if different) would be the ‘fee payer’ and would need to operate PAYE if instructed to do so by the end client.
Therefore, while there is some truth in the fact that an organisation does not need to assess individuals being provided as part of an outsourced service it receives, there may indeed still be some important and complex IR35 considerations.
When a contractor has multiple clients, this increases the likelihood that they are genuinely self-employed or outside IR35. However, this is only one factor in a myriad of considerations and all the key factors in relation to employment status should be considered to assess the nature of the engagement as a whole.
There’s no single test that defines status and the weighting of the relevant factors may vary depending upon the circumstances, and over time as case law and working practices evolve.
The fact that a contractor has multiple clients may be helpful to an outside IR35 determination, but it could also be of little or no significance, and may change from time to time, hence the need for both regular review and prior to each new engagement or extension.
When a contractor has multiple clients, this increases the likelihood that they’re genuinely self-employed if engaged as a sole-trader, or outside IR35 if operating via a PSC or similar intermediary. However, this is only one factor in a myriad of considerations for assessing employment status.
It’s possible, common even, for each of a contractor's engagements to be akin to an employment relationship in nature, just as a contractor with a single client might genuinely be self-employed or outside IR35. It’s necessary to consider the nature of each engagement without jumping to any conclusion in order to demonstrate ‘reasonable care’ – this is the approach that tribunal judges use and have dictated must be taken when considering status.
All the key factors in relation to employment status should be considered. There’s no single test that defines status and the weighting of the relevant factors may vary depending upon the circumstances, and over time as case law and working practices evolve.
It’s crucial to consider the nature of the engagement as a whole. The fact that a contractor has multiple clients may be helpful to an outside IR35 determination, but it could also be of little or no significance, and may change from time to time, hence the need for both regular review and prior to each new engagement or extension.
While the use of a compliant umbrella arrangement may indeed be a solution, organisations should be aware of the existence of non-compliant arrangements and their common pitfalls in order to safeguard their use.
Alternatively, the blanket inside IR35 conclusion may not give rise to a short-term financial liability as there’s no loss of tax and National Insurance Contributions (NICs). However, this approach does not demonstrate ‘reasonable care’ and could leave a business open to contractor disputes, greater costs and administration, as well as reputational risks.
Finally, some organisations have tried to sidestep IR35 through an outright ban on off-payroll engagements. By only engaging individuals via PAYE, they might do away with the administrative challenges of IR35 compliance, but will still face the commercial dangers mentioned above and may also be more costly.
While the use of a compliant umbrella arrangement may be a solution, the blanket inside IR35 conclusions does not demonstrate ‘reasonable care’ and could leave a business open to contractor disputes, greater costs and administration, as well as reputational risks.
Taking a blanket approach and assessing all contractors as inside IR35 and subject to PAYE may not give rise to a short-term financial liability in that there’s no loss of tax and NICs, hence there is technically no exposure to uncollected tax, NICs, interest, and penalties. However, there are a few dangers of this approach.
First, assessing an arrangement as inside IR35, regardless of the facts, is not meeting the legislative requirement for end users to take ‘reasonable care’. While not recommended, so long as the technicalities of the legislation have been complied with regarding issuing SDSs to the correct parties and responding correctly to any status disputes, there’s no loss of tax/NICs for which the assessing organisation can be pursued.
Second, a contractor in receipt of a clearly incorrect assessment or one which they feel does not accurately capture the facts of their engagement is more likely to appeal that determination via the statutory process. This itself can be an administrative burden with its own compliance pitfalls and one which may also strain the relationship with the contractor and/or the agency supplying them if applicable.
Third, this approach may incur unnecessary costs as over compliance would mean employers’ NICs (including the Health & Social Care Levy from April 2022) being paid when it may not be due had the engagement been assessed correctly, in addition to the incremental costs and risks of operating payroll.
Finally, and potentially most importantly, a blanket approach may give rise to wider commercial and reputational issues regarding talent attraction and retention.
Some organisations have tried to side-step IR35 through an outright ban on off-payroll arrangements. By only engaging individuals via PAYE, they might do away with the administrative challenges of IR35 compliance, but will still face the commercial dangers mentioned above and may also be more costly. A more agile organisation with a balanced yet robust approach to IR35 might be able to steal a march over competitors who operate a blanket IR35 approach or outright ban on PSCs.
While there’s nothing which precludes the engagement of contractors via umbrella companies and they can provide a useful solution, compliance is key. This should include awareness of the existence of non-compliant arrangements and their common pitfalls in order to try to safeguard their use.
HMRC do not state that it’s mandatory to use their Check Employment Status for Tax (CEST) tool to assess employment status for IR35/tax purposes. CEST also has some well-publicised limitations. There are alternative commercial assessment tools available and which take different approaches in attempting to overcome the shortcomings of CEST. While these naturally scale up perfectly for organisations with large populations of off-payroll workers, a good assessment tool can be invaluable as part of any ongoing process or one-off exercise to assess the status of contractors, regardless of population size, and should come at an affordable price per assessment.
There are a number of potential advantages to using an assessment tool, depending on which one you use. ESIP offers all the key features and was built using the collective expertise and experience of the employment tax team, who are also able to provide direct specialist input to clients where required, and keep them updated on wider issues, latest thinking and practice.
Our pricing model scales to suit populations of all sizes and our client base is broad, ranging from businesses who undertake one assessment per year to those who run 1,300 assessments per year.
We offer ESIP either on a licence fee basis with unlimited use, or as a one-off batch assessment which we can undertake on behalf of our clients. If you would like to find out more then please book a demo and obtain a bespoke quote here.
There are a number of commercial IR35 and status assessment tools available in addition to HMRC’s CEST, including ESIP. While these naturally scale up perfectly for organisations with large populations of off-payroll workers, a good assessment tool can be invaluable as part of any ongoing process or one-off exercise to assess the status of contract regardless of population size, and should come at an affordable price per assessment.
The best assessment tools can also be used to assess sole-trader engagements (i.e. not just those involving a PSC or similar intermediary), as well as provide a useful audit trail to monitor all off-payroll arrangements, and hence increase the scope and scale of their use.
There are a number of potential advantages to using an assessment tool, depending on which one you use:
Our Employment Status Intelligence Platform (ESIP) offers all of these features and our pricing model scales to suit contractor populations of all sizes. Our ESIP client base is broad, ranging from businesses who undertake one assessment per year to those who run 1,300 assessments per year. ESIP was built using the collective expertise and experience of our employment team, who are also able to provide direct specialist input to IR35 clients where required, and keep our clients updated on wider issues, latest thinking, and practice.
