Do you engage contractors in the security, international development or extractives industries in the UK or send them abroad? Does your company have a connection to the UK? Are you a contractor based in the UK? Then our 4-week blog series is a must-read around this rapidly approaching enforcement of the legislation that will impact you and your business.
Our 4-week blog series will cover:
4. What are my IR35 Options?
This week in, “What are my IR35 Options” we will learn a key lesson from the Public Sector implementation of IR35 and look at the options available to both organisations and contractors.
What did the Public Sector do?
The main lesson learnt from the Public Sector was to not “blanket assess” the contractor population. Making sweeping assessments that every contractor role is “inside” of IR35 can lead to turnover and disgruntlement, which will impact your service delivery. We saw some of this in the Private Sector in the run up to April 2020, when the legislation was due to come into effect.
What are my IR35 options?
Once you have completed an audit of your contractor population, you can determine what options are available to you:
• Outside of IR35 Determinations
Last week’s blog looked at how to mitigate IR35 risks through your working practices and processes, to understand how you engage and work with contractors. Once those are reviewed, and you’ve completed an IR35 determination, and that determination is outside, then there is no need to change anything from an end client or contractor perspective. Save the SDS and make sure you can prove reasonable care in the case of an HMRC audit.
• Pay As You Earn (PAYE)
Client: If following the review your working practices and processes, you determine that the majority of the contractor base is, “Controlled” or, “Part and Parcel” of your organisation, you may then look to change your contractor policy to only engage them on a Temp PAYE model. This would eliminate the need to assess any roles moving forward, as you would be IR35 compliant from the off, but may increase turnover in the short term.
Contractor: You can remain a Director of your PSC, and become an employee of your company, therefore paying PAYE taxes, whilst still taking dividends. Alternatively, you can convert to becoming a PAYE engaged individual through an Umbrella organisation or 3rd party – see Umbrella below.
The contractor becomes an employee under a reputable umbrella company, and the umbrella company withholds the appropriate taxes, thus mitigating IR35. You may be engaging contractors through umbrella companies today.
Client: Umbrella contractors are still contractors and can have some of the benefits of contracting, but are employed by the umbrella organisation, which withholds the appropriate taxes, thus mitigating IR35.
The Umbrella industry has had negative press in the past, but there are very reputable umbrella organisations in the market place, with some of the leading being: PayStream, Brookson and Giant.
Contractor: Becoming an Umbrella contractor allows you to retain your Personal Services Company (PSC), for roles determined outside of IR35, and affords you a, “one-stop” shop for roles, “inside of IR35”, whilst also giving you some benefits of being a contractor and being an employee. There are links above to leading Umbrella organisations but be wary of any Umbrella organisation offering you the chance to retain large %’s of wages, as these will not be IR35 compliant. If considering this option, do your research and go with reputable, established providers.
This is perhaps the least favourable model, as it is complicated to operate
Client: You will still assess each individual role, and from this, will have come to a determination that the contractor is “deemed inside of IR35”. You will only engage contractors for this role on the “deemed” basis, and the “fee payer” then must withhold the appropriate taxes.
Contractor: you can remain a contractor and can remain as the director of you PSC, but for this role, the “fee payer” then must withhold the appropriate taxes.
Based on tenure or outcomes of your working practices review, is there a portion of the contractor population that you could convert to full-time employees?
There will be potential cost impacts of doing this, and it won’t be applicable across the entire organisation, but there may be long-serving contractors or contractors in critical roles that you consider for permanent positions.
There are legitimate concerns as to whether IR35 applies when you are engaged abroad, for a non-UK registered, overseas end client. The widely held consensus here is that if you are registered in the UK for tax purposes, irrespective of where the work takes place, or where the end client is registered, you must ask the end client for an IR35 determination, and if determined as “inside of IR35”, the end client must withhold the necessary PAYE taxes.
- The Statement of Work (SOW) solution.
Can work be packaged up and genuinely delivered through milestone and deliverable based outcomes? If yes, then SOW is a viable solution. This does mean different engagement models but is an option to be compliant with IR35.
However, it must be a genuine SOW and you must be prepared to evidence the work as genuinely milestone based. If not, HMRC will look unfavourably and as not showing, “reasonable care”.
- Limited Liability Partnerships (LLP’s)
The IR35 legislation could see the growth of LLP’s, as End Clients will effectively outsource their work to LLP’s, and the LLP’s are employers of a workforce. LLP’s has a legal personality separate from that of its members (owners). With an LLP, the contract is between the third party and the LLP as an entity, as opposed to the PSC/Limited Company.
The key for Contractors in this scenario however…is the set up and running of an LLP – as you must have owners (members) and employees – the employees are key to the success. It will mean different insurances and certificates of incorporation. As with SOW’s, it must be genuine, if not, HMRC will look unfavourably and as an attempt to avoid the IR35 legislation.
- Regulatory Compliance
- Workforce Strategy and Planning
- Implementation and Project Management
- Change Management
- Market Analysis
- Cost Efficiencies and Business Analysis
- Diversity and Inclusion