Companies and large businesses using the services of freelancers who operate through a Personal Service Company have a big decision to make over the coming months. From April 2020 medium and large companies, as defined by the terms of the Companies Acts, will have to operate the detestable “IR35” rules, (more correctly the “intermediaries’ legislation”), in cases where they form the opinion that in the absence of their PSC the individual providing their services to the business would be an employee of the company. This is the same situation that businesses and large organisations in the Public Sector have been dealing with since April 2017 when the new version of the legislation was introduced for their “Off-Payroll” workers. Where the business decides that without the PSC the individual would indeed be an employee of their organisation then tax and national insurance, (employers and employees), must be accounted for and deducted from all payments made to the PSC by the business. Failure to do so could ultimately expose the business to interest and penalties imposed by HMRC, so this is not a decision to be taken lightly!
The number of individuals operating via a PSC that a particular business uses will to some extent dictate how much of a problem this actually is. Where for example a business uses only one or two such individuals then perhaps the matter can be disposed of fairly simply. It will necessitate carrying a detailed review of the circumstances under which the individual’s series are engaged via their PSC. The “IR35” legislation requires the presumption of a hypothesis; i.e. if the individual did not use the PSC is the nature of the relationship between the worker and the work provider one of “employment” rather than “self-employment”? If it is then the new rules must be operated. Anyone who has any experience of dealing with this much vexed tax “status” issue will know just how difficult it can be to make such a determination. There is a plethora of factors to be taken into account and none of them is decisive on its own. The business must review all the factors and then stand back and consider the overall picture before coming to a conclusion. Some cases will be clear, but many will not. Despite the fact that HMRC offers an online tool, (known as CEST) to assist businesses in making such determinations this issue remains far from clear in many cases. Decided case law on the subject recently also continues to muddy the waters with the HMRC winning some cases and losing others. If a business uses only one or two such individuals, then perhaps it will be able to devote the staff resources and time required prior to April 2020 to carry out such detailed reviews.
But what of the business that uses many such individuals? Experience in the Public sector suggests at that many organisations may feel obliged to take a defensive position and simply reclassify all their PSC users as “caught” by the IR35 rules and transfer them over to the new tax and Nic’s deduction system. This is an understandable and perhaps pragmatic defensive solution which will give the organisation some protection from the HMRC’s attentions going forward, (in the same way arguably that only using individuals who operated via PSC’s has done in the past but at much greater cost), but it will potentially have serious financial consequence for the PSC user and will cost the organisation potentially a very significant amount of money in National Insurance as well as additional costs in administering the system for the future. It will also most definitely affect their working relationships with the PSC freelancers. Where the individual offers unique and specialist services which are expert in nature and “hard to come by” the freelancer may be in a strong bargaining position to seek to increase their rate of pay. Where they are not then they may go elsewhere, and the business may find it difficult to source such specialist services thereafter.
Many businesses are already receiving flyers and marketing information from consultants and “specialists” in this field claiming to offer solutions to the problem. Some of my clients have already told me that they are feeling “panicked” into engaging the services of experts in the field because they may face having to pay such individuals holiday pay and other staff benefits in future! That may not actually be the case by the way unless the business actually transfers these individuals over to PAYE rather than the new IR35 system which is in effect a hybrid. A word of warning is probably apposite here. Experience also shows historically that such “quick fix solutions” often turn out to be overly simplistic and may not actually work so considerable care will be needed before following that path in my opinion. Such solutions often tend to over-simplify the issue.
The new regulations effectively put the onus for deciding whether or not an individual is genuinely self-employed on to the “end-user” and this represents a major decision and a difficult task for many businesses especially those who have little experience in this field.
As indicated above some organisations in the public sector simply took the view that from April 2017 it was too costly in terms of time and staff resource to make many such reviews of their individual subcontractors and that the safest defensive posture was simply to reclassify these individuals and operate the full version of the new rules. Whilst that may have been a pragmatic approach for public sector bodies to take, following this path for a business in the private sector may well represent a very costly decision and will potentially have significant consequences in terms of the supply of scarce specialist subcontractor resources and the costs involved in retaining their services for the future.
There is no easy answer to this problem. The “Off-Payroll” legislation applicable to the Public Sector since April 2017 seems to have proved a fairly robust set of rules and the new regime applicable in the private sector from April 2020 is looking similar. Businesses will need to prepare thoroughly and decide on their approach. Do they carry out individual reviews with the costs this will entail, or do they adopt the “transfer everyone” approach similarly with the financial and working relationship changes that this will inevitably bring? Either way preparation is going to be key and identifying the key individuals in the organisation who are going to have to cope with this problem and ensuring they are properly prepared, trained up and informed about the new rules is a serious issue facing many businesses over the coming months!
For an in-depth understanding book your place on our one-day IR 35 and the private sector – the future regime course. We can help Tax, HR and finance professionals understand IR35 and how to mitigate the risk by providing a thorough review of the proposed new legislation and discuss the implications for the “End-users” and owner-managers of the Personal Services Companies, we will also look at real life examples and calculations.
Alternatively, please email Quorum Training at firstname.lastname@example.org or call us on 0844 873 2121 for more information or to book your place.