April 2020 will see one of the most significant changes to the private contracting market in the UK. This presentations briefly explains why it exists, what effect it will have, and for those it will impact what they need to consider.

1. BaldwinsGroup.com
IR35 - A practical look at off payroll
working from a tax perspective
@BaldwinandCo

2. BACKGROUND TO IR35
• In the 1990s increasing numbers of employees were becoming consultants. In many
cases they would set up a company to provide their services, often referred to as
Personal Services Companies (PSC).
• Leave as an employee on the Friday and return on the Monday as a consultant
• Willing to give up certain rights and pay less tax and National Insurance (NI)
• Despite the consultant providing services they used to carry out as duties when
employed, the authorities had no mechanism to deal with the perceived avoidance
of PAYE and NI
• Hands tied as contractual agreement was between the engager and the workers
company
• In 2000 the government introduced IR35 legislation to recover “lost” PAYE and NI

3. IR35 REQUIREMENTS WHEN INTRODUCED
• When introduced, IR35 required the PSC/Intermediary to examine the relationship
between worker and end user to establish if it is one of ‘disguised employment’
• To meet this requirement the PSC would need to ignore its company as the
intermediary and consider the employment status of the worker as if the
intermediary does not exist
• An engagement is ‘inside IR35’ when the contractor works for a client through their
own intermediary but would be an employee if they were providing their services
directly
• Responsibility for assessing and applying IR35 falls with the PSC. If inside IR35, the
PAYE and NICs liability (i.e. the ‘deemed payment’) also sits with the PSC.
•

4. WHAT HAS CHANGED?
• From April 2017 Public Sector Bodies (PSB) (defined as organisations who have to
abide by the Freedom Of Information Act (FOIA)) engaging with ‘off-payroll’
workers provided through an intermediary are responsible for determining if IR35
applies
• In November 2018 the then Chancellor announced his intention to extend the
scope of the rules changes that applied to the PSB to the Private Sector from April
2020
• In July 2019 draft legislation was published confirming the extension of these rules
to the Private Sector and adding some additional rules which will apply to both
sectors.
•

5. WHY INTRODUCE THESE CHANGES?
• From its introduction HMRC, the government body responsible for making sure this
legislation is applied correctly, have found it very difficult to effectively police
• Limited resources within HMRC and lack of experience to enforce the legislation
• HMRC’s estimation that of around 3 million contractors only 10% would not be
caught by IR35
• Successive Governments were aware of increasing loss of Employer’s NI to the
Treasury
• 9 months following the changes to the rules for PSB in April 2017, it was clear that
in terms of additional money to the Treasury the changes had been a success
• So why wouldn’t you extend them to the Private Sector?

6. HOW IS IR35 ASSESSED?
• If there was not a PSC
involved, would this be an
employee-employer
relationship?
• It is the hypothetical contract
between the end client and
the contractor that’s
examined
•
Agency
PSC
PSC
Engager
Hypotheticalcontract
Hypotheticalcontract
Engager

7. HOW IS IR35 ASSESSED? SAME AS SELF-EMPLOYMENT!
Must assess the facts of the engagement on balance:
• Supervision, direction and control
• Mutuality of obligation
• Financial risk and opportunity to profit
• Provision of equipment
• Right of substitution and termination
• Integration into the organisation
• Employee benefits
• Contractual terms
HMRC will point decision makers to their Check Employment Status for Tax (CEST) tool to
determine status.

8. CURRENT IR35 RULES FOR PSBs
• Responsibility for considering if IR35 applies sits with
the PSB. They will need to consider employment status
for all ‘off-payroll’ workers.
• If the PSB is the fee payer and they have determined
IR35 applies they will have to pay the PSC net of payroll
deductions
• If an agency is used to pay the PSC, then the PSB must
inform the agency if the engagement is inside IR35 so
the agency can pay the PSC net of payroll deductions
• Any tax and NI, interest and penalties payable as a
result of an incorrect decision will fall with the PSB
engaging with the PSC
• Agencies who have been informed of IR35 applying
who fail to make appropriate deductions will become
liable for tax and NI, interest and penalties
PSB
PSC
Agency
PSC
PSB

9. CURRENT PRIVATE SECTOR RULES
• Contractors who currently provide their
services through an intermediary such as a
PSC are responsible for determining if IR35
applies
• The PSC should look at the employment
status of the worker (usually one and the
same) in respect of what they are doing for
the engager
• Where the PSC considers IR35 applies it will
need to calculate a ‘deemed payment’, which
effectively recovers the lost NI had they
actually been an employee
•

10. FROM APRIL 2020
The rules that apply to PSBs will be extended to
medium and large private sector businesses
engaging with ‘off-payroll’ workers through an
intermediary
In addition, further requirements have been added
to those rules which both PSBs and private sector
businesses will be required to abide by:
1. Liability transfer rules
2. The status disagreement process
Lets look at these in more detail…

11. CHANGES FROM APRIL 2020
Who is going to be affected?
• An estimated 60,000 engager organisations, predominantly medium and large-sized
businesses outside the public sector that engage with individuals through PSCs
• PSB organisations will also be affected by changes designed to improve the
operation of the rules
• Recruitment agencies and other intermediaries who supply staff through PSCs - an
estimated 20,000
• Approximately 170,000 individuals who supply their services through an
intermediary, such as a PSC, and who would be deemed employed if engaged
directly

12. LIABILITY TRANSFER RULES
• The transfer of liability provisions will form part of the new IR35 rules from 6 April 2020.
• Under the new IR35 rules, the liability for the tax, NIC, and (potentially) Apprenticeship Levy
due under PAYE where IR35 applies, will pass down the labour supply chain as each party
satisfies its obligations
• HMRC can potentially transfer those liabilities to an agency at the top of the labour supply
chain or to the end-client, where there is non-compliance further down the labour supply
chain and it is not possible for HMRC to collect the amounts due from the offending party.
• However, this action will only be taken where HMRC believe tax avoidance has taken place
rather than a genuine error
• End engagers and agencies who are at the top of a supply chain should undertake due
diligence to confirm all parts of the supply chain are being compliant

13. THE STATUS DISAGREEMENT PROCESS
• The draft legislation confirms that end user clients will be required to provide a status
determination statement to both the worker and any third party or fee payer, such as an
agency, that it contracts with.
• There will be a requirement for the statement to show whether a particular engagement is
regarded as in or outside of the rules and the reasons behind that conclusion
• You should note there will also be a requirement to apply reasonable care when reaching
the determination
• The legislation confirms that if this obligation is not met then the end client will take on the
responsibilities of the fee payer (for example to operate PAYE/NI if applicable), therefore
crucial to ensure the correct processes are in place
• Where a request for statements is made this will then need to be provided within 45 days
• If a worker disagrees with the determination, the end user will need to consider this and
provide a response within 45 days, keeping full records of the determinations and reasons
for them, as well as records of the representations made to them.

14. IMPACT FOR WORKERS
• These changes will mean that the right to decide whether IR35 legislation applies to
an engagement will be removed from the worker and will now rest with the end
engager, where the end engager is a medium or large business
• In many cases the end engager is likely to be cautious in their approach to
determining IR35
• Therefore, even though historically IR35 has not been applied, there is no guarantee
that it will not apply going forward
• How will HMRC react to the worker’s status changing from April 2020?
• Would HMRC challenge the individual due to the workers engager considering IR35
applies when the worker has not in the past?
• Engagers may consider bringing workers onto their payroll as employees

15. IMPACT FOR END ENGAGERS
• Private sector and PSBs engagers of off-payroll workers who operate via intermediaries will face
additional costs and challenges in dealing with them
• The engager will need to identify those existing arrangements that will be caught by the new IR35
legislation and consider the additional cost that may arise as a consequence
• For example, the workers who fall within the IR35 rules, from April 2020 will increase direct costs
to the engager, such as 13.8% employer’s NIC, the Apprenticeship Levy, where applicable at 0.5%
• Processes and potentially additional resources will need to be put in place to assess engagements
and provide a statutory status determination statement to the worker and any third party
• Further resources and time setting up and running a status disagreement process within 45 days of
the request
• Changes will be required to help meet IR35 compliance and PAYE/NIC withholding obligations going
forward such as where the engager is the fee payer putting IR35 workers on the payroll

16. IMPACT FOR AGENCIES
• Once the engager has determined the status to the agency, the agency will be required to
pass on the determination to the next party in the labour supply chain, for example a
second agency.
• Failure to pass on the determination will result in the tax and NIC liabilities resting with the
party that fails to pass on the determination
• The agency will need to set up a status disagreement process in conjunction with the worker
for deciding whether or not to challenge determinations made by the end engager
• Where IR35 does apply, the fee payer will need to apply PAYE withholding, incur 13.8%
employer’s NI and the Apprenticeship Levy at 0.5% where appropriate
• Additional processes and resources will need to be put in place to meet these IR35
compliance requirements
• A “due diligence” process to ensure all parts of the supply chain are compliant
• Establish a process to reduce the risks associated with the transfer of liabilities

17. WHAT ARE WE HEARING?

18. Engagers
•Where do we start?
•Default all workers to IR35
•Can we rely on the CEST
tool?

19. Agencies
•Is there a work around to
these rules?
•Who is liable for tax and NI
arising from errors?
•Increased costs, do we pass
them on?

20. Workers
• HMRC enquiries
• Can I have an input on decision
making?
• Reduced options to contract with
engagers willing to pay them gross
• Will I be made an employee?

21. Any Questions?
Craig Tolliday
Tax Associate Director
T: 01733 568321
E: craig.tolliday@baldwinsgroup.com

22. baldwinsgroup.com
@BaldwinandCo