Most companies will be well advanced in their response to this but there is still a lot of confusion about what needs to be done. We have advised over 300 companies on these measures and have seen a number of misunderstandings, errors and risky actions in some of the plans being made. Here are seven key tips:
1. Who is the end client? 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.
2. If an arrangement is determined to be inside IR35, is it lawful to reduce a contractor's pay rate to cover the cost of Employers NICs costs and Apprenticeship Levy? 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.
3. Are insurance-backed status checking services the solution? As previously indicated by us, 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, sections 61 B and C, and section 688A of ITEPA (the Income Tax (Earnings and Pensions) Act), 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.
4. Does this just affect supplies of PSCs via staffing companies? 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.
5. Are "Statement of Work" contracting models the solution? 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". The companies using this model properly are putting a lot of effort into completely new styles of contract and scoping and pricing projects, moving into a genuine output-based consultancy style of operation. Genuine statement of work is a different business model to staffing: it involves the supply of scoped deliverables rather than time and people.
6. Is moving all former PSC contractors to umbrellas safe? Use of umbrellas is understandable. Many have built very efficient payroll systems. However there can be serious risks. HMRC's Spotlight 54 Tax avoidance schemes currently in the spotlight (number 20 onwards) last year 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 in the last week 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 perhaps regrettably no statutory approval scheme for umbrellas, so you will need to do your own spotchecks on how workers are paid. Well-established umbrella companies will be happy to co-operate with you when you carry out checks. Beware those which appear to offer unfeasible tax savings to former PSC contractors and/or do not co-operate when you carry out checks.
Also remember that not all umbrella companies are PAYE umbrellas - in the construction sector the term is used to cover "CIS umbrellas" as well which is misleading because CIS workers are paid as sole traders under the Construction Industry Scheme: this is not the same as a full PAYE umbrella arrangement which should treat all worker income as employment earnings for tax purposes. We are aware that some agencies may be encouraging/allowing large numbers of PSC construction contractors to move to CIS sole trader arrangements (often called "CIS umbrella") in response to IR35. There will undoubtedly be some roles which are suitable for CIS sole trader and which do not give rise to risk under the agency worker tax rules (sestions 44 to 47 ITEPA) but for many roles this will not be the case. End users and staffing suppliers should take legal advice on the risks before moving large numbers of PSC contractors to CIS sole trader alternatives. Such shifts will, almost certainly, be visible to HMRC.
7. Is it enough for the end client to issue an SDS? Does that mean all risk of IR35 liability for PSCs they use passes down the chain? No. HMRC have 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 observe that end clients should choose suppliers with care, and expect 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 expect companies to check the compliance of their supply chains - see Supply chain due diligence principles - GOV.UK.
There are of course many other things to watch out for with the new regime. There are privacy law issues associated with engaging contractors through new supply chains. We have seen mistakes in new forms of contracts for contractors. Offshore end clients face complicated problems. And perhaps the most important thing to remember is that just because HMRC take no enforcement action relating to the new regime for a few years does not mean they never will. HMRC action always lags well behind the commencement date of legislation like this, so don't take your eye off the ball and don't let your operational teams get lax just because HMRC don't seem to be doing anything. Expect the first enforcement action in two to four years.
If you need help with any of these issues please let your usual contact Osborne Clarke know and we will be happy to assist.