Off-Payroll Working (IR35)
Changes to Off-Payroll Working (IR35) rules come into effect for the Private Sector from 6th April 2020. From April 2020 onwards, the general UK consultancy market will be fully aligned with the Public Sector, where the new Off-Payroll Working arrangements have operated since 2017.
The revised rules transfer responsibility to the End Client for deciding whether IR35 applies to a particular engagement. Where the End Client considers that working arrangements are similar those of employment (Inside IR35), then Tax and NI (both employee and employer contributions) are deducted in full by the client (or agency) before any amounts are paid to the worker’s personal service company (PSC). The disparity in 'Take Home' often equates to around 15% of day rates. Reduced opportunities for tax planning, loss of personal allowances and the requirement to cover travel expenses personally can compound the situation, particularly for higher earning consultants.
During the election campaign several political parties have made statements about reviewing the proposed ‘Off-Payroll Working’ changes in recent weeks. That said, it looks increasingly likely that Private Sector IR35 reforms will come into effect next year. As things stand, from April 2020, medium and large companies will become responsible for determining the tax status of contract engagements; the fee-paying party, often a recruitment agency, will carry financial responsibility. After April 2020 any new roles being advertised will have already been assessed by the client for IR35 status i.e. there will be certainty in advance as to whether an assignment is ‘outside the scope’ of IR35.
Many consultants already have the certainty of knowing that their clients are confident to agree IR35 does not apply to their assignment post-April. Others (particularly within the financial sector) find the immediate picture is less clear.
From the experience of IR35 changes within the public sector, agencies and end clients may wish to safeguard the status of their existing consultants i.e. avoid making any future status determination which may negatively impact upon a freelancer’s current IR35 position. To avoid the appraisal of existing assignments, some businesses (particularly those linked to the big banks) have already issued formal statements introducing blanket policies of only dealing with PAYE payroll services. How long any such blanket policies will extend post-April 2020 is a matter of some conjecture.
There is a general feeling that the market will begin to settle down relatively quickly, as it did in the public sector during 2017 - after all, the IR35 status appraisal criteria itself has not changed. So far, consensus from clients and within the industry remains that ultimately more roles will be ‘caught by IR35’ - the majority being relatively low paid, highly controlled roles which should be currently failing IR35 in any case; the majority of newly created higher rate, short-term consultancy assignments will continue to be assessed as outside the scope.
Indications of how the consultancy sector may evolve over the coming months can already be seen with legal firms entering the market offering client-side contract appraisal solutions and insurance policies; all aimed at providing end-clients and recruiters with the confidence and risk mitigation to continue engaging with personal service companies (PSCs). That said, rather than rely on insurance and third parties, ensuring that the genuine underlying working arrangements truly reflect written IR35 consultancy agreements remains the best way for recruiters and end clients to legitimately stay confident.
Coupled with Brexit, political uncertainty and the Economy, most would agree that the timing of these IR35 changes could be better. Over the months ahead, we’ll provide updates as the position across the consultancy sector continues to develop. For those without positive confirmation from their end-clients, it’s obviously difficult to properly plan ahead. Many of our clients have found it helpful in their decision-making to talk through short term options, and the context behind how end-clients are handling the transition of current engagements.
Temporary Umbrella Employment (Where insisted by the End Client and Agency)
Longer term, consultancy work both inside and outside the scope of IR35 can continue to be invoiced via . Short term, where there is pressure from clients to terminate pre-existing contracts, and temporarily become an employee of an umbrella, the tax implications will need to be managed. Most recruiters (and end clients) will have a panel of approved UK umbrella companies - it is worth speaking with us before making a final choice as to which one.
If there is to be additional umbrella employment income in the current tax year then it is particularly important to properly appraise the tax position. For example, there are likely to be additional taxes payable on dividends already declared. Also, where total personal income exceeds the £100K annual threshold, deductions of around 66% (combination Tax, EEs NI & ERs NI) become due on the next tranche of earnings. For obvious reasons, many umbrellas are reluctant to deduct all this tax at source. In turn this can often lead to large unexpected tax bills via self-assessment