12 December 2019 - Post by:Rachel Reeves
IR35 might as well stand for ‘Interchangeable Risk‘ because effectively that is what the legislation scheduled to come into force in April 2020 will create – a means of shifting liability for PAYE from one party in the supply chain to another.
The risk of liability for PAYE tax and NICs deductions will shift from the personal services company (PSC) to either the client (the company which receives the PSC worker’s services), or to the agency which places the PSC worker with a client. Whether or not that risk shifts will depend on whether the worker is deemed to be inside or outside IR35. The problem is that it will not always be easy to decide on which side of the line the worker falls and this is where the decision surrounding risk comes into play. The legislative changes mean that the PSC will no longer carry that risk because it will cease to be responsible for determining the worker’s employment status for tax purposes; instead, the client will become responsible for that. However, if the client would prefer not to carry that responsibility or risk, an intermediary agency or umbrella company offers them a means of passing on that risk.
Confused? Admittedly at first glance it does appear to be confusing, particularly given that ‘deemed employment’ status for tax purposes does not necessarily mean that an individual qualifies as an employee for all other purposes. Indeed, how could they? Under the PSC structure they are also likely to be an employee of that company. From a tax perspective, put simply, the question is: if the PSC didn’t exist, would they have been engaged directly as an employee? There will be many instances where the answer is yes and that’s where the risk lies. For example, if a worker is engaged by a company to cover a maternity absence, the argument goes that ‘but for the existence of the PSC’, the work they are performing would be that of an employee. They will therefore be considered to be inside IR35 and taxed as an employee. They will not be deemed to be an employee of that company as they remain the employee of the PSC for the duration of that contract. The problem is that the company will need to run the worker’s payroll and make the PAYE tax deductions to HMRC. You can therefore see why, in this scenario, the engagement of the PSC worker becomes less attractive.
It’s much more appealing to have a third party running the payroll whilst the worker provides the maternity cover services to the company. However, if the third party fails to make the PAYE deductions, the company will still be at risk of a demand from HMRC, penalties and interest as the risk simply passes down the supply chain. This is a reminder to ensure that the paperwork between the company, the third party and the worker all stacks up and that appropriate indemnities are provided.
There is a lot of resistance to the introduction of the new legislation and it’s not difficult to see why. It’s almost like a game of ‘pass the parcel’ except no one in this game wants to be left holding the parcel, i.e. the tax liability. The good news for those workers engaged via a PSC is that they have a responsibility lifted, but the downside is that with that reduced responsibility comes a 17% reduction in their take home earnings. Inevitably they will want to renegotiate their fees to try and balance out this loss. Conversely the fee payers will not want to increase their costs for the same level and type of service they were buying previously at a lower price and with HMRC circling overhead. It’s a difficult conundrum to resolve but despite attempts by a significant number of contractors to try and stop the legislation, and potential delay to implementation due to the General Election, where there is a question mark over compliance with tax, in my experience, the needs of HMRC will likely outweigh those of the protesters.