IR35 Reform Preparation and Update

According to the cliché, time flies. It certainly doesn’t seem like over six months since the Treasury Secretary stood up in Parliament and announced that the private sector IR35 reforms would be pushed to April 2021. And yet, here we are with less than six months to go until the legislation is yet again reformed, looking at potentially significant ramifications for many private sector businesses.

It is time to take stock of the incoming reform, and for clients to ensure that the opportunity made available from this temporary reprieve is used productively to mitigate any impact and ensure a compliance plan is in place. The good news is that the past few months have been fruitful for employment status case law, and, in particular, the significance of mutuality of obligations in the employment contract. The Tribunals’ decisions have reinforced the strength of a genuinely agreed and unambiguous freelance contract, and this is the foundation upon which IR35 compliance is built.

Preparing for the changes

There are several steps clients should be taking to ensure that they are ready for the reforms. Firstly, and most importantly, a full assessment of the supply chain and any PSC engagements needs to be undertaken to identify the contractor population at risk.  The reformed legislation places potential PAYE liability throughout the supply chain so it is not simply a case of reviewing direct contractor engagements – all labour supply contracts need to be included in the review. These are not always transparent, so time may be needed to fully elucidate where any risks are lurking.

Once this task has been completed, terms and conditions of engagement need to be reviewed and considered and an IR35 determination made. Where possible, terms can be renegotiated with a view to removing risk from an existing arrangement – so long as such renegotiations are genuine.

Contractual terms up- and down-stream also need to be reviewed. There are several important clauses that should be negotiated into contracts post-April 2021. These include terms relating to notification of an IR35 dispute with HMRC, deduction of tax and NIC, processing the all-important Status Determination Statement (“SDS”), and, essentially, setting out a procedure around any challenge to the SDS.

This last aspect is fundamental to the reform. HMRC have recently issued updated guidance confirming our interpretation of the legislation that a contractor or a deemed employer does not have to disagree with an SDS in writing, they merely have to disagree verbally to invoke the statutory dispute procedure. Given that this statutory dispute procedure shifts IR35 liability back to the end client, it is imperative that a procedure is defined between the parties as to the correct channel for proper notification of a disputed SDS, and that other parties in the supply chain are notified of what is going on. This single minor administrative point could result in a party unexpectedly being liable for IR35 if mishandled.

Updated legislation

There have also been some changes to the final version of the legislation as enacted in the Finance Act 2020.

Firstly, the legislation has clarified that an end client must have a ‘UK connection’ for the reforms to apply. This broadly means a residence, branch or office in the UK. If this is not the case, the existing IR35 rules could apply and the PSC would remain responsible for any liabilities.

There is also a newly introduced duty on the client to confirm within 45 days whether it is small or not, if asked by the worker or the worker’s agent.

The so-called ‘Client-led Status Disagreement Process’ has also been amended. When responding to disagreement about an SDS the client now has the legal right to amend the SDS conclusion from a specific date onwards, rather than amend it generally.  Furthermore, the client does not have to respond at all after the final payment has been made in relation to the worker’s services (which makes sense).

The most important change here though is to the shift in liability: as originally drafted, if a client did not respond properly to an SDS challenge within 45 days the IR35 liability passed permanently to the client and was stuck there. This has been changed so that the client will only remain liable until the client does respond, from which point a new SDS can be issued and the liability can be passed down the supply chain again. This is good news for clients who miss the 45-day deadline, but again underlines how important it will be to track carefully any disputes over status determinations.

HMRC’s recently issued IR35 reform guidance, also confirms our earlier advice that it is possible to get an IR35 decision ‘unreasonably right’.  It may seem strange, but in its guidance on the issue of a valid SDS HMRC provide one example of a lack of reasonable care as being:

• determining that every worker who provides their services through an intermediary is caught by the off-payroll working rules without giving any consideration to the specific facts of each individual case

This effectively indicates that a Client issuing blanket ‘caught’ decisions without due consideration of the arrangements will remain liable for the IR35 duties.  It is still obviously the case that a caught decision will likely mean that the worker moves to direct employment, an umbrella company or suffers PAYE at source (so there is little or no actual liability for the Client) but this point is likely to arise in dispute or debt transfer cases, when deciding where primary liability arises.  As indicated in our earlier newsletter, it may even be in the Client’s interest to argue this itself in a debt transfer case.

You may also have seen reports this week of a potential flaw in the IR35 legislation as drafted. The requirement that an individual must hold a material interest (e.g. minimum 5% shareholding) was widened, with the result that all intermediaries, including umbrella companies and agencies, would arguably be swept up in the reforms. This was clearly never the intention of the legislation, and HMRC’s new guidance confirms this to be the case: the reform will not apply to existing employees who are engaged under PAYE (unless engaged by their own intermediary). We fully expect this drafting deficiency to be corrected before implementation.

Assistance and guidance

Chartergates are on hand to guide you through the reforms and advise on drafting and strengthening contract terms as set out above. We have developed an IR35 Toolkit that explains the reforms in straightforward detail, provides an IR35 Risk Register, employment status assessment tool and the template documentation you will need to comply with the new reforms.

Contact the IR35 team on 01908 533255.