On 7 February 2020, HM Revenue & Customs (HMRC) issued further amendments to the IR35 rules that will apply from 6 April 2020. This additional guidance is welcome and provides clarity in the areas requested when we met with HMRC earlier this year. But perhaps there is more to be done.
This announcement comes ahead of the government review, which is due to conclude in mid-February 2020. The guidance provides further details about how the changes are intended to work in practice and has been published to further support organisations prepare for the changes. The guidance is still draft and may be subject to change prior to the conclusion of the review.
The amendments are as follows:
- The rules will now only apply to services provided after 6 April 2020, whereas the original guidance stated the rules would be applied to all payments after 6 April 2020. This change results in organisations not having to consider services performed in March 2020, which was causing some difficulty. Now organisations only have to consider the IR35 rules for services performed and contracts that will continue after 6 April 2020.
- The guidance also clarifies HMRC’s definition of ‘reasonable care’. Reasonable care means clients should act in a way that would be expected of a prudent and reasonable person in the client’s position. HMRC acknowledges that the circumstances of clients will vary greatly and therefore it has published examples of behaviour that reflects reasonable care, as follows:
- Accurately applying and keeping a record of the employment status principles.
- Accurately completing HMRC’s Check Employment Status for Tax tool.
- Applying HMRC guidance on determining status.
- Seeking the advice of a qualified professional adviser.
- Having someone with a good understanding of the work to be undertaken involved in the determination process.
- Checking existing individual determinations to ensure they remain valid and accurate.
- Reviewing the processes being applied and amending these for future determinations where necessary.
- If there are any material changes to a worker’s terms and conditions, or working practices, making a new status determination.
- Checking and reviewing the processes of other parties where the determination process is subcontracted to another party. But the client remains responsible for the accuracy of the Status Determination Statement (SDS) even if it subcontracts that responsibility.
- The SDS should be issued by the public authority or medium and large private sector clients to determine whether the off-payroll working rules apply to an engagement. The client should then communicate that decision, by way of the SDS, to the worker and any third party it contracts with. The legislation does not specify the format or method by which the SDS should be issued, but the client should ensure that the worker is knowingly able to receive or access it.The SDS should be reconsidered with every change in terms and conditions or working practices. Where labour is sourced through a third party, the SDS should be issued to the person contracted with for the worker’s services. If the SDS is not passed onto the third party contractor, the client remains liable. The SDS should be issued on or before payment is made. If payments are made before the SDS is issued, this will result in responsibility for tax, National Insurance contributions and Apprenticeship Levy sitting with the person who hasn’t passed the SDS on.
- The guidance brings in a ‘client-disagreement process’ which should be adopted and must follow the set-up guidance published by HMRC, as follows:
- Consider the worker’s and/or the deemed employer’s (ie agency) representations. These representations could be made verbally or in writing.
- Respond to the worker and/or the deemed employer’s representations within 45 days, beginning with the day the representations are received, not from when the SDS was issued.
- Inform the worker or deemed employer that they have considered their representations and that they have decided that their original SDS was correct and provide reasons; or
- Inform the worker and deemed employer they have considered representations and decided the original conclusion was wrong, provide a new SDS and state that the previous SDS is withdrawn.
- Take reasonable care in making any new SDS and ensuring it contains the reasons for reaching that conclusion. Representations can still be made at any time. However, the client is only required to respond to representations made during the course of the engagement and before the final chain payment is made. If the above minimum conditions are not met, the responsibility of payment to HMRC will revert back to the client.
- When services are contracted out, it could be difficult to determine who the client is and where responsibilities lie. Where a person enters into a contract with an intermediary for the supply of a worker, they will be the client, unless they are an intermediary themselves. If a contract is entered into for a fully contracted out service, they will not be the client. This is because the worker’s true client is the party who the work has been contracted out to; the ‘service provider’.
Whether a contract is for a fully contracted out service is a question of fact, based upon the commercial reality of the arrangements. The following should be considered when determining this position:
- The nature of the business;
- The nature of the service provider’s contract and relationship between the worker, the service provider and their customer.
We are currently supporting many clients with these changes and have first hand experience of the challenges and best practice in the area of IR35. If you would like to discuss the changes outlined above in more detail, please speak to your usual Saffery contact.