IR35 Technical Guidance: Confusion and Risk
The technical guidance to support the change in IR35 legislation was released on 5th December and can be found here: https://www.gov.uk/government/publications/off-payroll-working-in-the-public-sector-reform-of-the-intermediaries-legislation-technical-note/off-payroll-working-in-the-public-sector-reform-of-the-intermediaries-legislation-technical-note#treasury-procurement-rules-for-public-appointees
It provides extra information on the changes and how they should be applied, and although there is still no publication of the HMRC online test, which will be used to determine IR35 status, the guidance does provide 7 detailed scenarios with an assessment or whether the off payroll rules apply or not.
Once of the key surprises is that the responsibility for determining the IR35 status of the worker now shifts entirely to the public authority engaging them, even if an agency sits in the middle. Previously the guidance had stated that whichever party was closest to the worker in the contractual chain would make the determination, so if an agency sat in the middle, it would be their responsibility. That said the fee payer, be it the agent or the public authority if the worker is engaging direct without an agent, will have to make the PAYE and NIC deductions if the worker is deemed in scope. I have mixed feelings about this, on the one hand I have been relieved of the burden of determining IR35 status, but on the other hand I’m reliant on my public authority client making that determination and informing me of their decision.
I’m fearful that not enough public authorities will be ready for this responsibility, and may adopt a low risk, default, assume-they’re-all-in-scope policy. Since the changes were first mooted in April 2016 your average public authority has not had too much reason to pay attention, given most will use agencies to source interims and having read the previous guidance, we’ve all assumed the agents would take on most responsibility for determination assessments. Now at the 11th hour, public authorities will be taking the lead role. This split of responsibilities – public authority determines status / agent acknowledges that decision in how it makes payments to the PSC, confuses where the risk lies.
As an agent I’m absolved of making the determination decision, but must abide by what the public sector decides when I calculate payments to be made to the PSC. If a worker was declared out of scope and an investigation subsequently revealed they were in scope, the public authority should be liable for recouping unpaid NICs and PAYE, and yet it will be my business who has been paying the fees to the PSC. If that responsibility for recouping unpaid taxes had to be shifted to me it would be wholly unfair, given the public authority would be at fault for not correctly making the original determination decision. Equally if the public authority was responsible for trying to recoup the unpaid taxes, the worker may well respond to say “my contract is not with you, take it up with my agent”. If the liability does sit with the public authority, I’m all the more fearful that they will apply the blanket in scope policy, with the associated message to say, “if you think you’re out of scope, come and prove it to us”. I spoke to an experienced interim NHS HR Director about this and she agreed, saying “most NHS organisations will have a complete lack of understanding of IR35 and are unlikely to put it in front of their lawyer, which would incur costs.“ Additionally she said the average HR function is highly risk averse, and if a HRD delegates to a Deputy or HR Business Partners, their risk aversion will be even stronger, meaning a blanket all in scope policy is all the more likely be applied.
Having said all of that, interims should take note of point 34 in the guidance, which states that “The public sector client can also be asked by the person they have contracted with about the reasons or reaching the conclusion they did”. If anyone feels hard done to by a blanket policy, they can remind their public sector engager of this point as a means of initiating a challenge.
I had also expected an amnesty on existing contracts which roll past 6th April. But point 11 states: “This measure applies to payments on or after 6 April 2017 and so will affect contracts entered into before 6 April 2017 and operating after that date. Public authorities and agencies and third parties supplying workers to the public authorities need to consider existing contracts and prepare for the change.”
Expect mayhem. Public authorities should as a matter of urgency be auditing their current use of contractors, assessing which contracts have projected end dates beyond 6th April 2017 and preparing for the change. Likewise interims in the same boat should be assessing their level of risk, and the likelihood that their current contracts are in scope of IR35. If they are, come 6th April their engaging client is likely to assess, determine they are in scope and as of that date change the contractual terms to ensure that they, or the agent if there is one, start to make paye and NIC deductions. Public authorities have 3.5 months to prepare and the key tool they need (the HMRC online assessment tool) to start planning for this change has not even been published yet. I expect to be proactively engaging my clients straight away to make sure they are fully aware of the changes in legislation that they quite probably haven’t heard of, and encouraging them to make fair and timely assessments. But the chances of me or any other agency having IR35 determination decisions on all current interims presented to us on or before 6th April are slim to none. I would expect no decisions, late decisions or blanket decisions, which will create an administrative mess for me, and will likely incur significant accounting fees as I have to calculate back taxes on receipt of decisions that come in May, June, July etc, but that should have been applied to the worker’s payments from 6th April.
Needless to say, agencies can expect their numbers to drop off a cliff on March 31st. Being the end of the financial year, it is the most common finish date already in the calendar year, but I would expect clients to finish interims where they don’t have a good reason to retain them, to avoid the burden of assessments, and of course many interims will spot the imminent tax deductions and reductions in their pay and decide to finish their current roles. The only problem is that there is no green grass elsewhere, only scorched earth. The flood of interims coming into the market are likely to find low demand, increased competition because of plentiful supply, and a much greater proportion of what is out there in scope.
Its revealing that of the 7 scenarios, only 1 puts the worker out of scope of IR35, perhaps a hint to the proportions of interims that HMRC expects to find genuinely out of scope. And whilst we still don’t have the HMRC online assessment tool, we can at least draw some conclusions from that 7th example of how a worker will need to be operating to find themselves genuinely out of scope. The example given is for Jasmine, who contracts through her PSC with a local authority and is tasked with building a new website. She consults on the brief, has “a large amount of control” for how she delivers her work, and apart from checkpoints, “her work will be largely unsupervised”. Additionally, her contract states she has to:
• deliver the website to an agree standard by the agreed date • visit the council’s offices for meetings, but will mainly work from her own office • provided her own equipment needed to do the job in hand • employ her own staff to help deliver the contract if she needs to • cover her own costs and expenses
These characteristics reveal what we can expect to find in the on line HMRC tool, workers hoping to be found out of scope need to be delivering an end result or product (and not just delivering business as usual or sustained performance), they need to have the option on where they work, provide their own equipment, employ their own staff and cover their own expenses. All of which sounds like a small scale consulting business, and one of key options I mentioned in my last blog for interims who want to carry on working independently outside of IR35.
There is already plenty of publicity out there for how bad a year 2016 has been, but for interims, agents and the public authorities who have been able to easily access vital resource for so long, in 2017 it might be about to get even worse.