Contract and Interim Information

 

Workers engaging assignments through an agency are covered by the Agency Workers Regulations (AWR) as set out in 2010 (updated in 2019), These are designed to ensure that after a qualifying period, agency workers were entitled to the same pay and working conditions as permanent employees.

 

AWR legislation defines an agency worker as someone who “is supplied by a temporary work agency to work temporarily for and under the supervision and direction of a hirer; and

(b) has a contract with the temporary work agency which is —

(i) a contract of employment with the agency, or

(ii) any other contract to perform work and services personally for the agency.”

 

Day one rights 

• Access to facilities typically available to permanent staff (such as canteens and childcare facilities).

• Being included in the internal communication of vacancies.

• The opportunity to apply from within, before the end-hirer outsources to fill the vacancy.

 

• The qualifying period for which the worker has worked in the same role, with the same end-hirer.

• The regulations for temporary agency workers expand to include working condition regulations such as breaks and annual leave, as well as equal pay.

 

• An employer must be provided with a written statement confirming the agency worker is entitled to rights relating to pay conferred by regulation 5 of the 2010 regulations. 

• If the employer fails to provide this statement, the worker is within the right to complain to an employment tribunal.

 

• We will only use accredited members of the FCSA (with compliance at the centre of our process). 

• We have a detailed understanding of the Contractor and Hiring Company's needs and advise on the best solution for each situation. 

• We will not engage with companies or individuals that wish to trade outside of the correct methods.

 

The phrase IR35 has been around for some time now. It is shrouded in mystique and is complicated by many years of changes; designed to help HMRC collect the tax that is rightly owed to them.  

 

IR35 relates to ‘Intermediaries Legislation’ brought in by the then Chancellor of the Exchequer, Gordon Brown as part of his 1999 Budget. Becoming part of the Finance Act 2000, IR35 is the 35th Inland Revenue news release of that budget: ‘Countering Avoidance in the Provision of Personal Services’ which was released on the same day as the Chancellor's Budget. So IR35 is just a reference to the Inland Revenue 35th press release, although it is now been generally used to refer to the.. ‘Intermediaries Legislation’ it refers to. More recently, ‘IR35’ has been referred to as ‘off payroll’ working rules. So if you see the term IR35 or off-payroll they both relate to ‘Countering Avoidance in the Provision of Personal Services’. IR35 is used for simplicity.

 

The HMRC were concerned that individuals and companies were avoiding paying their correct tax by utilising Limited Company status, while essentially being controlled by the company in the same way as its time employees.

 

At the same time, the company using their services will simply pay an invoice based on an agreed hourly rate and therefore avoid paying PAYE & National Insurance contributions. Further benefits to a company are that they can turn this cost off at short notice if necessary. For clarity, IR35 is designed to ensure individuals and the company they are doing work for are making their correct tax contributions. If the individual is paying PAYE through an umbrella company, they will not be affected by IR35. This also applies to the company provided they are paying their correct HMRC contributions.

 

For this explanation, an individual who is offering their services through a Limited Company will be referred to as a ‘contractor’. This includes contractors, Intermediaries, Temps (or whatever you want to call them) who offer their services through a Limited Company. 

 

If the status of the specific assignment is correct, an individual can use their Limited Company to offset costs and benefit from lower PAYE & National Insurance contributions in the same way as any other Limited Company.

 

‘The HMRC do not have an issue with contractors as such. They have an issue with contractors who are essentially employees of the company benefiting from lower PAYE & National Insurance through invoicing from a Limited Company. In 2017, HMRC estimated that the cost of non-compliance in the private sector would reach £1.2 billion by 2022-23, although much bigger numbers have been mentioned by others’.

 

The line between a contractor and an employee can be very clear; but it can also be vague. For example, an individual carrying out a specific task for multiple companies where they bring a specific skill set or service offering (e.g. a skilled trade person), is very clearly a contractor. However, the same trade person working for one company on a full-time basis, benefiting from the same benefits as a co-worker who is an employee and working to the same rules, is an employee. These contractors may not be contributing to the HMRC employee or employer PAYE & National Insurance. 

 

HMRC are not there to police employee rights which may be diminished by this situation. Their interest is that the correct employer and employee PAYE & National Insurance payments are made. If the employer is paying their employer PAYE & National Insurance contributions and the employee is meeting their tax commitments through a Limited Company, the HMRC will be satisfied. 

IR35 legislation is designed to collect underpaid PAYE & National Insurance from both the company and the contractor if HMRC determines that the individual acting as a contractor is an employee. This determination will be made by the HMRC irrespective of any written or verbal contracts the company or individual may have.

 

The changes to IR35 legislation came into place for the Public Sector on the 6th of April 2017. They were due to come into force for the Private Sector on the 6th of April 2020, but due to the COVID-19 outbreak, the government felt it prudent to delay its implementation for one year. 

There was some speculation that this delay may become a cancellation. However, the government is committed to implementing this legislation on the 6th of April 2021. 

 

Post 6th April 2021 - If a worker provides services to a customer (the end-user) in the Private Sector that is a small company, the worker's intermediary (i.e. Limited Company) will remain responsible for deciding the worker's employment status. However, if the customer is a medium or large-sized company the fee payer will be responsible for deciding if the rules apply.   

 

The Companies Act 2006 defines a ‘small company’ as a business with two or more of the following characteristics: 

• A turnover of £10.2 million or less

• A balance sheet of £5.1 million or less

• 50 employees or fewer

 

The fee payer is the company, recruitment agency, or any other third party that is paying directly responsible for paying the contractor.

 

If IR35 is deemed to apply, the fee payer will need to pay the related tax and NI contributions to HMRC. Employer’s NI will have to be paid too. Any company that is paying workers through an intermediary (i.e. Limited Company) and any individual who is invoicing a company through an intermediary, will be directly affected by the changes to this legislation. The changes have already taken place in the Public Sector, giving HMRC a good understanding of how to implement them; with case studies already available to illustrate the significant costs that can be incurred by getting this wrong.

 

The emphasis of this legislation has shifted from HMRC having to chase every contractor to collect unpaid PAYE and National Insurance, to the ability to collect shortfalls from the companies hiring these individuals. Depending on how many contractors a company hires, the route the company uses to hire them and how they pay their PAYE and National Insurance outside of their control will determine the size of the debt owed.

 

A contract for IR35 can be written, verbal or implied between the company and the contractor. The IR35 working rules apply on a contract by contract basis. A contractor may have some contracts which fall within IR35 and some that fall outside of IR35. HMRC are not concerned with what the contract says, they are only concerned with what is happening in practice. If the end-user is a small company, the contractor will continue to be responsible for assessing whether IR35 applies. While size may be obvious, this cannot be presumed and it would seem sensible in practice for a customer or their advisor to ask for a size statement along with the contract; so that everyone in the chain, particularly the worker, knows whether the contract is operating under medium to large company rules (or the small company rules) and who is responsible for what.  

 

So if a company is in the bracket of small, it is not responsible for taking the employed/self-employed decision. It does not have to pass any information to any other party in the chain.

Therefore the emphasis of this Legislation is aimed at medium to large size Private Sector companies and all Public Sector companies. The emphasis is on the fee payer to ensure that the correct contributions are made, however, the customer (end-user) is responsible for issuing a status determination statement (SDS). The SDS is a new and important document, informing all those involved whether or not payments for the work will need to be made under deduction of PAYE and National Insurance.

 

The customer (end-user) is obliged to pass on the details of the statement of determination to the fee payer so that they can take the appropriate action. The fee payer will report the National insurance and PAYE contributions deducted directly to HMRC. Failure to pass this information on will implicate the customer in the failure for the correct payment of PAYE and National Insurance, therefore exposing the company to HMRC investigation and potential fines. It is also the case that failure further down the supply chain could result in the end customer being responsible. So it is in the company’s best interest to ensure all processes and procedures are followed very diligently. Nobody is in the clear here.

 

Inside IR35 and outside IR35 are commonly used terms to illustrate the difference between a contractor who is acting as an employee and a contractor who is legitimately not an employee. Inside IR35 refers to a contractor who is acting as an employee and therefore both the company and the contractor should be paying HMRC PAYE & National Insurance contributions in line with all other employees. Outside IR35 refers to a contractor who is legitimately not working as an employee and therefore can invoice the company and pay their tax through their Limit Company; in the same way that all other Limited Companies do.

 

There have been several ways to determine if a contractor is inside or outside of the IR35, with the emphasis on how much control the company has over them. Over the years third-party companies have established businesses based on writing contracts to avoid the payment of PAYE & National Insurance through various clauses (loopholes) to meet HMRC requirements. This new legislation is designed to overcome these loopholes irrespective of what the contract says. HMRC will make their determination by what is happening not by what a contract says is happening.

 

This still leaves a massive amount of uncertainty around who is inside or outside of IR35. 

Medium to large-sized companies need to decide whether a specific contract implies employment or self-employment tax status. Having decided this, they should issue a status determination statement (SDS) accordingly. To assist companies to make the status of determination statement - HMRC have created a check employment status for tax (CEST) tool. However, there is some concern that the HMRC tool will find the majority of contracts as employed status meaning that PAYE & National Insurance should be deducted when in actuality this is not the case. It is also the case that the determination given from using the CEST tool will not be an absolute defence in an HMRC investigation. 

 

HMRC will look at what is happening and make their decision from this investigation. There are plenty of reasons why CEST was described as “not fit for purpose” by the Lords, who also said it “falls well short of what is required” in their damning report into IR35. From its inflexible logic to its failure to provide answers based on all aspects of IR35 case law, the argument that CEST poses a risk to the businesses that rely on it is well known.

 

QDOS commercial services who are experts in IR35 have identified issues with question format.

They argue that IR35 is an incredibly complex issue, this is evident from a glance at the reams of case law available at our fingertips. As such, it should not be approached with a simple ‘yes/no’ questionnaire.

 

IR35 status must be viewed holistically looking at the full picture. With HMRC treating it as simply black and white, there is a large grey area in between that is not being accounted for which does not allow for the many nuances present with different industries.

 

By reducing IR35 to a series of multiple-choice questions, HMRC is failing to collect vital information that could inform the overall outcome. Each case should be treated separately, and as such, you should be given room to provide more specific answers that could have a substantial impact on your IR35 status. It is preferable to see any multiple-choice question boxes paired with a commentary box for additional information, this way the full context of an engagement can be taken into account. Many of the questions are also framed in a way that can easily be misinterpreted and/or encourage certain answers. 

 

An example of this is substitution, which is one of the most pivotal factors when determining IR35 status. The key question on CEST itself asks whether the customer has the right to reject a substitute, with a binary yes/no answer. In the explanatory note it states: “This can include rejecting a substitute even if they are equally qualified, and meet your interviewing, vetting and security clearance procedures”.

 

However, in the CEST section within the Employment Status Manual, it states: “Where the hirer can only reject a substitute upon grounds that they are not qualified to perform the work, this would fall within the ‘No’ category for CEST provided it would be practical and plausible for the worker to send a substitute.”

 

The Employment Status Manual provides guidance for HMRC staff and is not linked to CEST, but the clarification above would have a significant impact on a user’s interpretation and subsequent answer to one of the most important questions. Such clarification can be found here.

 

IR35 is an incredibly complex issue - this is evident from a glance at the reams of case law available at our fingertips. As such, it should not be approached with a simple ‘yes/no’ questionnaire.

 

IR35 status must be viewed holistically looking at the full picture. With HMRC treating it as simply black and white, there is a large grey area in between that is not being accounted for, and which does not allow for the many nuances present with different industries.

 

By reducing IR35 to a series of multiple-choice questions, HMRC is failing to collect vital information that could inform the overall outcome. Each case should be treated separately, and as such, you should be given room to provide more specific answers that could have a substantial impact on your IR35 status. It is preferable to see any multiple-choice question boxes paired with a commentary box for additional information, this way the full context of an engagement can be taken into account.

    

The vital status test of mutuality of obligation has been a sticking point for CEST ever since its inception in 2017.

 

First, we must answer - what is mutuality of obligation? Put simply, mutuality of obligation refers to the fact that there should be no obligation for the employer to provide work to the contractor. Equally, there should be no obligation for the contractor to accept or provide their services to the employer. As such, there should be a mutual lack of obligation between the parties. This applies to the start and end of the contracted services as well as during the services being provided – for example, a customer should not be able to change the scope of services being provided and move a contractor from task to task without renegotiation of the contract and written agreements in place.

 

It is widely recognised that the mutuality of obligation is a vital indicator of IR35 status. Before the updates to CEST in 2019, HMRC received heavy criticism for omitting the status test of mutuality of obligation altogether. HMRC stated that their CEST tool worked on the assumption that, “A person using CEST will have already established MOO, which is necessary for a contract to exist, otherwise there would be no need to be using CEST to determine the status of the existing or hypothetical contract” HM Revenue & Customs.

 

From this comment made by HMRC, it would follow that mutuality of obligation by necessity already exists in any contract. Therefore, MOO would not be of any use as an indicator of IR35 status whatsoever. It is clear through looking at past case law that this is not something that is mirrored in the reasoning of Tribunal decisions.

 

We must take a look at the updated version of CEST to get a full picture of HMRC’s viewpoint on MOO. Thanks to 2019’s updated version of CEST, we saw a relatively small inclusion of the status test of mutuality of obligation. Some new questions added appeared to begin to address the issue of MOO. Questions such as those in the “Business on own account” section.

 

Despite this, there is still a lack of regard for the importance of mutuality of obligation. It should be made clear, in each engagement, whether or not obligations exist between both parties. In addition to this, it is important to note that if you answer previous questions in a certain way then the “Business on own account” section of the questionnaire remains unasked. Meaning that it remains possible for CEST to make an IR35 determination without making consideration of mutuality of obligation – one of the three key tests as established in the case of Ready Mixed Concrete.

 

Again, QDOS commercial services who are experts in IR35 that as the CEST tool is not considered legally binding, there are examples of cases in which CEST has been disregarded altogether to conclude IR35 status through the court.

 

An example of this is in the 2019 case of RALC Consulting Ltd v HMRC. HMRC themselves applied to reject the CEST determination as evidence yet gave no reasoning as to why. They neglected to provide any comment as to which parts of the CEST determination they rejected. Unsurprisingly this application was denied. This case does, however, go to show that HMRC will not let a positive outcome from their CEST tool get in the way of chasing potential tax revenue.

 

NHS Digital also provide an example of where reliance on HMRC’s CEST tool can still result in a bill to the tune of £4.3 million. Despite carrying out CEST determinations on each of their contractors, HMRC claimed that the results of individuals were not recorded and, as such, they hadn’t kept a detailed record of the CEST assessments undertaken. Bear in mind that this was before any release of the ‘reasonable care’ provision which now provides keeping a record as an example. 

 

Ultimately, HMRC’s promise to ‘stand by the result that CEST gives will only happen once they have satisfied themselves that the information used to generate it was accurate. Given some of the key questions are subjective, this gives HMRC plenty of room to challenge the accuracy of the tool’s use.

 

HMRC has emphasized the ‘Fee Payer’ being responsible for ensuring that the PAYE and National Insurance deductions are taken. The ‘Fee Payer’ is usually the party paying the contractor. However, there are certain rules stipulating certain conditions a fee payer has to meet so everybody must understand if the person paying the contractor meets conditions. If no other party in the supply chain meets the conditions, the customer becomes responsible. 

The customer is obliged to pass on the details of the statement of determination to the fee payer so that they can take the appropriate action. The fee payer will report the National insurance and PAYE contributions deducted directly to HMRC. The fee payer or the contractor can challenge a status determination if they think it is wrong. The company that made their determination will need to have a process in place for dealing with disagreements about determinations they make. 

 

Fear of getting this wrong with the financial costs from fines and the reputational costs from high profile court cases involved has meant that some organisations (banks etc) have decided that all contractors are to be treated as inside IR35 and therefore prove that they are paying their PAYE & National Insurance correctly. Whilst on the face of it this may seem a logical and safe reaction, the implications here are that these companies will not only be paying unnecessary PAYE & National Insurance but also that the best contractors will choose to work for another company that will correctly define them as working outside of IR35.  Therefore the best solution is to make a clear and honest judgement of each assignment to ensure the best contractors are attracted and that the necessary PAYE and National Insurance contributions are made.

 

The payment of PAYE & National Insurance will usually fall to the third-party agency, however, if a company employ the contractor directly then it will also be the company’s responsibility to deduct and remit these to HMRC. It is currently proposed that if any other party in the contractual chain fails to account for PAYE & National Insurance the liability will be the customers as end-user. Therefore it is within everybody’s interest that these decisions are made carefully and honestly.

 

There have been some very high profile cases illustrating the cost of getting this wrong. Here are two examples, one where the contractor has been fined and the other the employing company: 

 

TV journalist, Christa Ackroyd, the BBC offered Ms Ackroyd a contract in 2001 to present the BBC’s equivalent programme, Look North. The IR35 enquiry into Christa Ackroyd Media (CAM) Ltd. regarding its engagements with the BBC began in 2011 and resulted in a Tribunal Hearing, which was heard in September 2017. CAM Ltd. appealed HMRC’s decision that the company was caught by the IR35 legislation, more specifically that Ms Ackroyd was a disguised employee. Whilst it is known that the total liability for tax and NIC purposes concerning CAM Ltd.’s engagement with the BBC is more than £400k, the actual amount that CAM Ltd. will have to repay is unknown and may have to be addressed at a future Tribunal hearing. It was the BBC who sought that Ms Ackroyd set up her own Limited Company and when questioned by HMRC regarding Ms Ackroyd’s employment status, the BBC terminated her contract and consequently avoided any employment obligations concerning Ms Ackroyd, came away completely unscathed.

 

The NHS has been hit with a £4.3million tax bill after HMRC decided it had set its contractors’ IR35 status incorrectly, even though the organisation used the taxman’s very own IR35 tool, CEST when doing so. NHS Digital announced in its Annual Report and Accounts that despite having used “the toolkit supplied by HMRC” to determine IR35, the tax office is under the impression contractors engaged between 1st April 2017 and 31st December 2018 had their tax status assessed inaccurately. As a result, HMRC is demanding millions in unpaid tax, interest and penalties from the national healthcare service. NHS Digital explained in its published accounts that it “undertook a considered assessment of the status for each contractor which we believed met the HMRC requirements.” Despite conducting case-by-case IR35 determinations, the numerous flaws and inaccuracies of CEST - which NHS Digital used to assess status - meant that these contractors, in the eyes of HMRC, were wrongly placed outside IR35. 

 

 

Lorraine Kelly and Kaye Adams 

HMRC has lost two high-profile cases in the tax tribunal concerning IR35 legislation. Lorraine Kelly and Kaye Adams (of Loose Women fame) both succeeded in challenging the assertion by HMRC that IR35 legislation applied, significant defeats for HMRC in cases which it would, presumably, have felt confident of winning.

Above all else, this should serve as a reminder to businesses that rely on CEST poses a considerable risk, even if they are assessing the status of each contractor individually.

 

Note:

All of the information in this document is for guidance only and is not designed to represent facts or be your only point of reference. ACS are very happy to discuss this further with you and introduce you to Qdos who after all are the experts in this field.

 

The Construction Industry Scheme (CIS) is a vehicle used by HMRC for collecting the tax owed by self-employed subcontractors who work in the construction industry.

 

Contractors working within the construction industry are required to make deductions of withholding tax before making payments to subcontracts regardless of whether the subcontractor is registered for CIS.

 

CIS applies to payments by a contractor to a ‘subcontractor’. In this case, the subcontractor is the person receiving payments for the provision of construction work. This includes most work in the construction industry. 

For example:

• Site preparation (i.e. laying foundations and providing access works)

• Demolition and dismantling

• Building work

• Alterations, repairs and decorating

• System installation for heating, lighting, power, water ventilation

 

The flat rate percentage of tax withheld and paid to HMRC is dependent on whether the subcontractor is registered with the CIS scheme. Contractors who take part in the CIS scheme must deduct the following tax from their subcontractors:

• If the subcontractor is registered with the CIS 20% of the invoice will be withheld and paid to HMRC.

• If the subcontractor is not registered for the CIS 30% of the invoice will be withheld and paid to HMRC.

 

The deductions made will contribute towards the subcontractor’s tax liabilities. If you’re working through a limited company as a CIS subcontractor, the deductions made can be offset against the company’s Corporation Tax liability.

 

It is a very similar situation if you are a sole trader. However, CIS deductions are instead offset against your tax liability when you submit your self-assessment tax return. Many CIS subcontractors qualify for a tax rebate on the submission of their self-assessment tax returns. Please be aware that if you are working through your own limited company, you must still consider IR35. This means that if you are a contractor or a subcontractor if your assignment is affected by IR35 then this will override any CIS rules and regulations.

 

There are some exceptions where you don’t need to register as a CIS subcontractor, even when working in the construction industry. Certain jobs excluded from the CIS scheme include:

• Cleaning the inside of buildings following construction work

• Architecture and surveying

• Scaffolding hire (without labour)

• Carpet fitting

• Making materials used in construction (including plant and machinery)

• Delivering materials

• Any other work on construction sites that wouldn’t be deemed as construction (i.e. running a canteen)