From April 2020, the requirement to ensure working practices are compliant with IR35, also known as the "off-payroll working rules", is shifting from individual workers to end users of their services in the UK private sector.
This will affect businesses who use consultants or contractors operating through intermediaries, such as personal services companies (PSCs).
As the enforcement deadline creeps closer, cracks in the business community's preparedness for the change are starting to show.
In particular, many are anxious about how work delivered through complex chains of different entities can be made fully compliant with the new rules.
One of the main areas of confusion around IR35 is what tax liability employment agencies, and those contracting with employment agencies, will face with respect to individuals they place, if those individuals are contracted through a PSC, or similar.
Unfortunately, there is no simple answer to this, as liability will be fact-specific.
While the responsibility for status assessment in these circumstances will most likely rest with the client of the employment agency, employment agencies also have the option of taking advice on the IR35 status of individuals and then passing this onto the workers and their clients.
This should ensure that the position is completely clear to all parties.
Every analysis needs to be tailored to the company, PSC or other intermediary, and the role of the individual concerned.
A good practical tip for employment agencies, and those contracting with them, is to make transparency a key contractual requirement.
The contract should ensure a flow of information between all concerned so that status determinations can be carried out and confirm who is responsible for operating PAYE.
Communicate to illuminate
Clear communication is key to minimising the risk of being caught out by IR35, but many struggle to put this principle into practice, especially given the lack of understanding around the new legislation and a palpable degree of resentment against it among many businesses and individuals.
Since IR35 is not going away, the answer is to address these concerns before the new legislation comes into force.
Every company should have policies, procedures and contractual protections (in commercial agreements) in place to ensure information can be passed smoothly up and down contract chains
A simple but surprisingly useful step businesses can take is to maintain IR35 checklists, which can be drawn up in consultation with advisers, or by referring to HMRC's online "Check employment status for tax" (CEST) pages.
Several businesses and individuals have reported frustrations with using the dynamic CEST tool, however HMRC's guidance around IR35 should be read carefully and factored into approaches to compliance.
A number of those who stand to be affected by IR35 have expressed surprise and dismay that HMRC has not launched a mass awareness or guidance campaign about the changes to off-payroll working rules, and fear being tripped up by inaccurate hearsay.
Again, given that this is unlikely to change, the onus is on companies and individuals to check the information that has been published on HMRC's website.
When dealing with an international group, does IR35 apply?
If work is being provided to a business by a contractor who is not UK resident, this may fall outside the remit of IR35.
For IR35 to apply, the contractor needs to be a UK tax resident.
Tax residency rules can be complex, and this is something both companies and individuals should give due consideration to when assessing their IR35 status.
Whether IR35 applies will therefore be a question of fact.
It has come as a shock to many individuals who provide services through intermediaries that IR35 does not have a direct correlation with their employment rights.
It does not automatically follow that if you are assessed as ‘employed’ for tax purposes under IR35, you are similarly classed as ‘employed’ for employment law purposes (although the tests for both are very similar).
There has however been a notable trend towards individuals asserting ‘worker status’ (for employment purposes), where they are deemed to be an employee for tax purposes.
This is because they are paying tax as employees, but have no corresponding protection under employment law, and want to align the two positions.
If large numbers of individuals begin to assert worker status, this could impact employers who may have to rethink their business models.
Given the complications that can arise and the way tax and employment law treat individuals differently, organisations need to consider carefully how they communicate with individuals and, more importantly, what strategies to adopt from April 2020.
For example, they should consider whether it is it better to provide individuals with worker status, so the dichotomy between tax and employment law is eliminated; or retain two separate statuses, which can be confusing; or simply terminate the arrangement with some individuals altogether.
Any decision about changes of status need to be considered carefully, preferably in consultation with a professional adviser.
Part time consultants operating through intermediaries, even those providing services to others at the same time, can still be caught by IR35.
When assessing an individual's IR35 status for a particular relationship, the fact that a person's engagements by other clients are not classed as employment is irrelevant.
A tribunal will look at the facts of the specific engagement to determine whether IR35 applies.
Will business costs rise as a consequence of IR35?
The ultimate aim of IR35 is for HMRC to boost tax receipts from workers who are wrongly benefiting from lower tax rates charged to companies, when they should be paying National Insurance Contributions (NICs) and PAYE on earnings in the same way as regular employees.
This raises the question of where the increased tax burden will fall once IR35 comes into force in April next year.
Contract workers may decide to increase their fees, while end users of workers' services may push for lower rates to compensate for having to pay employer's NICs for contractors.
How this plays out will depend on individual circumstances and is generally a commercial negotiation point, but it is likely that the overall cost of doing business in the UK will rise as a result of this legislative change.
Keeping calm and carrying on
It should be stressed that the enhanced scope of IR35 is not an end to consultancy or contractor relationships.
For parties who wish to maintain a non-employment relationship, certain steps may be necessary to ensure these arrangements are not caught by IR35.
For instance, it is advisable for clients to agree fixed project fees, rather than hourly rates for time and materials.
Contracts made on a time and material basis are often viewed by HMRC and tribunals as being more akin to an employment relationship (and thus susceptible to IR35).
Fixed project fees, however, tend to fall more on the side of self-employment, although it should be noted that fee arrangements are just one aspect of the employment status assessment.
Additionally, companies should ensure that individuals do not appear in their organisation charts, have company email addresses, use company stationary or computer systems free-of-charge, as these all strengthen the argument that a worker is an employee, rather than a contractor.
Although it is often time-consuming and complicated, companies should always assess the impact of IR35 on a case-by-case basis, rather than adopting wide, blanket determinations for workers.
Such approaches can leave businesses open to challenges from individuals unhappy about their determinations and also from HMRC, which may disagree that all workers should be given the same classification.
This article was co-authored by Ranjit Dhindsa, employment partner, Matthew Sharp, dispute resolution lawyer and tax specialist and Ryan Hughes, legal trainee at Fieldfisher. For more information on the firm's IR35 guidance and its employment and tax expertise, please visit the relevant pages of the Fieldfisher website.