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IR35 workers already subject to PAYE not caught by new rules

Penny Simmons explains a welcome clarification from HMRC on the scope of the rules. 
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    NEWS – 23 October 2020

    IR35 – workers already subject to PAYE not caught by new rules

    As you will be aware, in April important changes to the IR35 rules will take effect for the private sector. A reminder – these are the rules that employment taxes should be paid by people who provide services to a business through an intermediary, usually a personal service company (PSC), if that person would otherwise have been regarded as an employee of the engaging business. Currently, where a private sector business engages a contractor through a PSC, liability to decide whether IR35 applies and to pay any employment taxes rests with the PSC. From April next year the rules will change so that engaging businesses will be made liable for determining whether the IR35 rules apply. They will also be required to operate PAYE and pay employers' NICs. The changes were originally due to take effect back in April but the start date was delayed a year as a result of the pandemic. Well the news is that HMRC has just made it clear that the changes are not intended to apply to arrangements where workers are already subject to PAYE on all of the income from their engagement. The problem, which HMRC has now recognised, is a technical one but it would have had serious implications if not corrected. The concern had been around the definition of an intermediary in the new IR35 legislation that was introduced in the 2020 Finance Act. An amendment was made to the draft legislation which was designed to protect against arrangements put in place to side step the new rules – so that change was made with the best of intentions – but an unintended consequence, not spotted by the Revenue at the time, was to further widen the application of the rules. Tax specialist Penny Simmons explains:

    Penny Simmons: “The way the legislation was drafted originally, in the in the original draft legislation, the definition of an intermediary, when it came down to whether that intermediary was a company or not, was slightly more limited and was looking at whether the individual worker, so we're talking about the person who's providing that personal service to the business, it was looking at whether that individual worker had what's called a material interest in the limited company in the intermediary and without going into the nuts and bolts of what a material interest was, you're basically looking at the percentage share, broadly speaking, that that individual had in the limited company. Now, what happened is that, before the legislation, the draft legislation reappeared in the Finance Act 2020, which came in at a much later stage because the rules have been delayed because of the Covid-19 pandemic. So when that legislation reappeared, what actually happened is they've amended the definition of what an intermediary is so that the legislation no longer looks at whether that individual worker just has a material interest in the intermediary, but also talks about whether the worker has received what is known as a chain payment from the intermediary. So all of a sudden, and this was unexpected, and this was not foreseen, and it was actually unintended by the Revenue and by the government, but all of a sudden we now have this situation where the IR35 rules, as currently drafted and coming into force in April 2021, no longer apply to situations just where you have a business, known as a client, that engages an individual worker through their limited company and that individual worker is providing personal services and under the rules should be taxed as an employee, but you also have a potentially much broader scope of intermediaries now, rather than just these personal service companies and the concern now is that the IR35 rules as drafted would catch arrangements where a worker comes through an umbrella company even though that work is already being subjected to PAYE employment taxes, through the umbrella arrangement, because the individual is getting a chain payment from that umbrella company because ultimately, you've got individual, umbrella, potentially agency, and then you've got the business and there is this payment, if you like, that is going through the chain. That's one concern. There are other concerns where you may have an individual worker who've been seconded to a business through the client and, again, that secondment may be subject to PAYE employment taxes but still strictly, according to the legislation, that individual worker is receiving a chain payment and therefore the seconded company is an intermediary under the new rules and therefore could be caught by IR35."

    Covid-19 advisory – s44 ERA 996 

    One of the biggest issues for employers right now as the country sees a marked rise in Covid-19 cases is how to deal with employees who are anxious about coming into work.  Of course in some cases the employee will have very good grounds for staying at home, most obviously where there is some form of lockdown or they have themselves tested positive or they are self isolating, but equally there will be cases where the employee could come to work, the employer wants them back, the office is open and the job cannot be done from home. This dilemma is being covered regularly in the HR press and, we’ve noticed, is being given plenty of space on the websites of the trade unions who, as you might expect, are keen to explain to their members what their rights are and generally raise awareness. So what are the legal obligations and how do you best manage those employees who are reluctant to come to return to the workplace because of their fears of Covid-19? We are advising on this regularly.

    Under normal circumstances, if an employee refused to attend work, they would be disciplined or potentially dismissed. However, in the current situation, employers have to be very careful of claims for unfair dismissal and for detriment suffered. But these are not normal circumstances.
    Protection for employees comes chiefly in the form of two statutory provisions - sections 100 and 44 of the ERA 1996: Section 100 says an employee who is dismissed shall be regarded as unfairly dismissed if they leave the workplace where they believe that the danger is serious and imminent and the belief cannot reasonably be averted or if they took appropriate steps to protect themselves from this danger. Section 44 provides another cause of action which is based on health and safety grounds, using similar statutory tests.
    The key point for employers to understand is that under s100 and s44 the employee’s view of the risk they face is subjective, so it is based on their perspective.  So an employee's right to refuse to work depends on the reasonableness of the view they are taking, considering what they know and what have been told. There is a lot of case law on this - these provisions are decades old and well tested - and they show clearly that what employees understand to be the official advice from employers is highly relevant. It follows that clear and effective communication by the employer is vital which, in the current circumstances, is definitely a challenge for employers because, of course, the official government advice changes so frequently on so many issues. So what is the best way to handle it? 

    A number of points: First, you need to really try hard to understand the employee's individual circumstances and understand exactly why they are taking the stance they are taking. It follows that managers need to avoid taking a one-size-fits-all approach when dealing with employees who are reluctant or refusing to return to work. Some managers, understandably, feel that the fairest thing to do in these situations must be to treat everyone exactly the same – that seems fair – but in this situation that would be the wrong approach so they need to understand that. Thirdly, for most employers disciplinary action is the default position where staff are refusing to attend work but you need to be very careful about jumping into that. It is going to be very challenging for an employer taking that route, especially if the employee has personal circumstances that prevent their return. Instead perhaps think about holiday or unpaid leave if those are workable – a number of our clients have had fruitful discussions with employees around those options. Fourth, be aware of the whistleblowing protections. This this is really coming to the fore right now as an extra layer of protection for employees. So an employee's concerns, if they are not dealt with properly, could also amount to a protected disclosure and ultimately trigger a claim against the employer. We notice the unions are making a big play of flagging this to their members so awareness of the issue has never been higher. 
    Finally, what about pay? If there are reasonable grounds for the employee's belief then a failure to pay full pay could be a “detriment” under s.44, so that's a risk to be aware of. The employee is unlikely to be “sick”, so simply paying them sick pay is likely to be challenged. Also, whilst the provision of SSP has been extended to those shielding or self-isolating, it wouldn't apply to someone who is otherwise fit and does not fall into either of those categories. It follows that in those circumstances the individual would remain entitled to full pay but, we have found, the number who fall into this category is often quite limited. So overall the message is this is a tricky issue which requires careful handling and an awareness of that risk of imposing a detriment, so do take legal advice before withholding pay.  

    Remote hearings – communication on the day and the use of WhatsApp groups

    Finally tribunal practice. As you will be aware, as a result of the pandemic the employment tribunal system has been forced into new ways of conducting hearings, implementing technology for remote hearings online using CVP – Cloud Video Platform – and the general consensus is that in all likelihood the tribunal landscape will be changed permanently- so we all need to get used to this and get on board with it. Currently we have a situation where we have some hearings conducted entirely in-person, some completely remotely and some a hybrid of both. Recently we heard from head of Cloisters chambers, Jacques Algazy, talking about some of the unique problems thrown up by remote hearings – he sits as an employment judge so has seen it first hand - and we are returning to this because his chambers has just produced a webinar which looks at some of the practical difficulties they have experienced, and the best ways to overcome those difficulties. The webinar is around 30 minutes long and we have put a link to it on our website for you if you'd like to watch it in full - it features four of Cloisters barristers. One issue they cover, that we thought we would flag up for you, is an issue we have come across ourselves a number of times, namely making sure you have effective communication procedures operating on the day. Here is barrister Tom Brown on that particular issue:

    Video – Excerpt from Cloisters chambers' remote hearings webinar

    A reminder, coming up next month on 25 November we have our Open Course on "Preparing for tribunal: A step by step guide". It is a virtual classroom session, online, a half-day course comprising three 50 minute sessions from 10am to 1pm and examines each stage of an employment tribunal claim, from receipt of the application to the hearing. Remote hearings will be one of the topics we cover in that. You can register for that directly from our website.

    For now from me that’s the news. Good bye.


    - Link to Cloisters chambers' remote hearings webinar


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