As you will probably know, widespread changes to the IR35 rules came into force for the private sector on 6 April. However, there remain some important and potentially costly issues which HR needs to be alive to. They relate to your supply chains, and we will come onto that shortly but first the background.
IR35 is shorthand for the tax legislation designed to combat tax avoidance by workers, and the firms hiring them, who are supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary were not used. HMRC deems these workers to be employees and to be taxed accordingly. On 6 April responsibility for that status determination switched to the hirer, the end user, hence why it is crucial to understand what contractors you have on your books and judge accurately whether they fall inside or outside of IR35.
Despite the new legislation and detailed guidance from HMRC a lot of questions remain unanswered especially when it comes to complex supply chains. So, uncertainties about whether a supply is ‘fully contracted out’ and therefore the identity of the client bearing ultimate responsibility for IR35 compliance. We have been helping a number of clients on this issue and tax specialist Penny Simmons, has written about the issue in some detail for Tax Journal, explaining that until HMRC publishes guidance on this issue the uncertainty will continue. So, let’s look at this in context and see what, if anything, HR can do to help. Penny joined me by video-link to discuss it. I started by asking her to explain the issue, in simple terms:
Penny Simmons: “So, the issue here is all to do with when you have a business that is engaging with – let’s call them a service provider because I think that's the simplest way to differentiate between the business and the service provider – you’ve got a business that engages a service provider. It could be a consultancy business, it could be a construction business, to provide a suite of services. So, it could be that you have a business having a whole suite of IT services being delivered by one consultancy. It could be that you have a business that's a property developer, or a large property business, that is actually having a building developed, a building built, and it goes to one contractor to deliver the whole suite of services in relation to that build. Now, often, what we find is that the business says well IR35 is not relevant to that because I am just having a service delivered to me whether it be IT or whether it be construction services but, actually, if the delivery of those services has an element of a provision of labour, so key individuals being provided to deliver those services, it could be grey, or questionable, as to who is the client. Is the client for IR35 purposes the service provider, so the business that's providing the whole suite, the package of services, and may well control the individuals who are engaged through limited companies off payroll and so could fall within the scope of IR35. Or is the client for IR35 purposes the business that's engaging with that service provider for the suite of services, the project to be delivered, and it is grey, and that's why it's becoming a big issue.”
Joe Glavina: “So given it is a big issue Penny, what can HR do about it?”
Penny Simmons: “So, the first thing that I'd say HR needs to do, and businesses need to do, is to become alive to the fact it's an issue. The reason I say that is because pre-April 2021, pre-April this year, we were in this situation whereby businesses were very preoccupied with what I would call the straightforward examples where IR35 might be relevant. So, what do I mean by that? I mean, where a business engages directly with an individual, off payroll, and they're engaged through their limited company - very straightforward, potentially within scope of IR35, need to make an assessment as to whether IR35 applies. Then you have the other, again, I would call them straightforward examples where a business routes their off-payroll workers through an agency and needs to work out whether those workers, provided through the agency or engaged through limited companies, could fall within the scope of IR35 and, again, make those status determinations and issue those status determination statements. Now pre-April, that was where the focus was in relation to IR35 compliance and businesses were very preoccupied with that and we were telling them to be. So, making sure that their portfolio of potentially ‘in scope’ contractors was identified and making those status determinations. But, what a lot of businesses simply didn't have the time to do was to devote resources to thinking about well, hang on, where are services being provided to us, and as part of that provision of service, as part of those projects, the delivery of those projects, are individuals being engaged and are those individuals being engaged off payroll, potentially through limited companies, to which IR35 might be relevant, or are they simply employees of the service provider, because if they're employees of the service provider you don't need to worry about them and businesses now need to become alive to that issue. They might have dealt with their what I would call straightforward IR35 compliance, but now it's time to devote some time and resources to looking at wider delivery, wider relevance of IR35 in terms of what projects are being delivered to a business, and is there a provision of labour as part of the delivery of those projects to which IR35 could apply? Now, even if IR35 does apply, it's not necessarily a major risk to those businesses because they may well not be the client for IR35 purposes. The client may well be the service provider, but businesses, and HR teams and procurement teams, need to become alive to the issue and have a look at those framework agreements, and those project delivery agreements, and establish who is the client for IR35 purposes.”
Penny’s article for Tax Journal is called ‘IR35: the prevailing uncertainties’. You will need to subscribe to Tax Journal to be able to access the full article but, in case you want to do that, we have put a link to the relevant web page in the transcript of this programme.
- Link to Tax Journal article ‘IR35: the prevailing uncertainties'