IR35 An employment perspective Clive Dobbin (Partner) Sarah Hayes (Solicitor)
What is IR35 and what is the background? • Tax anti- avoidance rule to address “disguised employment” • Historically employees would set up a Personal Service Company (“PSC”) to provide their services. Pay less tax and avoid National Insurance (NI).
When does IR35 apply? Is there a hypothetical contract? • A is a person • B is usually his/her personal service company (PSC) • C is a company to whom A provides personal services through his/her personal service company (PSC)
Off Payroll Working- What is it? B A C Written contract Individual Personal Worker/ Services Client Contractor Company
What are the current rules? What the current rules? • Currently (i.e. pre-April 2021), the contractor (A) is responsible for assessing whether IR35 applies. • Personal Services Company (B) ignores its company as the intermediary. • Considers whether the worker (A) would be an employee if they were providing services directly to the client (C). • If so, the Personal Services Company (B) is responsible to make appropriate PAYE and NI deductions on the fees that the Personal Services Company receives.
Off Payroll Working- What is it? A C B Written contract Individual Worker PSC Worker/ Client Contractor Hypothetical contract Lower level Upper level contract contract Agency PSC Client Hypothetical contract
Why is this changing in April 2021? • Already applies in public sector • In 2018, Chancellor announced an extension to the scope of the rules to also apply to medium and large organisations in the private sector. • Postponed and due to come into force April 2021.
What are the changes? • From April 2021, responsibility for assessing whether IR35 applies will shift, from the contractor/PSC to the end user/client. • If the end-user/client determines that IR35 applies, the responsibility for operating PAYE and NI moves from the PSC to the “fee payer” (i.e. the entity which has contracted directly with the PSC).
How is it changing? • Client = Highest person in the contractual chain ▪ Required to make a determination of whether IR35 applies • Fee-payer = person immediately above the intermediary in the contractual chain ▪ Treated as making to the worker, and the worker is treated as receiving, a payment which is to be treated as earnings from an employment (“deemed direct payment”) ▪ Therefore required to operate PAYE ▪ Fee earner is the entity that is contracting directly with the PSC.
How is it changing? Individual Worker/ Contractor Client PSC “Client and “Fee - payer” Individual Worker/ Contractor PSC Agency Client “ Fee- payer”
Employment status Very topical area of employment law Categories • Employee • Worker (not a tax status) • Self employed o Under limited company/personal service company o Sole trader
Employment status – why does it matter? Employee Worker Unfair Dismissal Yes No Minimum notice Yes No Redundancy Yes No Maternity leave & pay Yes No Statutory sick pay Yes No
Employment status – why does it matter? Employee Worker National minimum wage Yes Yes Working Time Reg (holiday) Yes Yes Discrimination Yes Yes Auto-enrolment Yes Yes
Employment status Employee ‘an individual who has entered into or works under a contract of employment’ Section 230(1), Employment Rights Act 1996
Employment status - factors • Personal Service • Pay • Mutuality of obligation • Control • Equipment • Risk • Integration • Sickness/holiday
Worker – definition Any other contract….whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not…that of a client or customer of any profession or business undertaking carried on by the individual
Worker – factors • Personal service • Business undertakings • Mutuality of obligation
Worker – Business undertaking Similar factors to employment test, but ‘bar set lower’ • Control • Exclusivity of arrangement • Duration • Method of payment • Supply of equipment • Level of risk
Limited company contractors • Individual supplied to client through limited company • No direct contact between individual and client • Courts can look behind limited company to reality of situation
Pimlico Plumbers
Pimlico • Treated as self employed • Had been engaged for 5 ½ years • Worked full time (although contract said not obliged to accept work) • Required to wear uniform • Drove van with Pimlico logo on side
Pimlico • Provided own tools • Accepted risk – insurance & if client didn’t pay • Right of substitution • Restrictive covenants
Pimlico Held • Not an employee • But was a worker
Uber
Uber • Uber argued that simply a technology platform for taxi drivers • No commitment to offer any work • Driver supplied vehicle, responsible for all costs • But when signed onto app, was available for booking
Uber • Driver offered work, 10 seconds to accept, if not allocated to someone else • If didn’t accept work, could be suspended from app • Uber set price for journey • Passenger pays Uber, who pay driver less service charge • No uniform
Uber Drivers were workers when: • In territory in which authorised to drive • Turned on app • Ready and willing to accept fares
What steps can be taken to prepare? • Consider atypical workers • Consultants • Off payroll working • Casuals • Consider if: • Actually employees; or • Workers
What steps can be taken to prepare? • HMRC’s Check Employment Status for Tax (CEST) tool • End user clients required to provide a status determination statement (“SDS”) to both the worker and any third party contracted with. • Ensure processes in place to pass the SDS to the worker and any relevant third party. • What if determination is challenged? • Do you have template documentation ready?
What does this mean? • Engagers may consider bringing workers onto their payroll as employees. • Engage individual directly as a self-employed contractor? • What other issues are you experiencing?
Any questions?
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