We understand for many, ‘IR35’ is starting to sound like ‘GDPR’, the end of the world as we know it, which tends to switch people off. Bear with us…these reforms bring about huge changes for our industry; changes which could potentially lead to huge costs for the end user of contractors (or as legally defined ‘workers’).
For decades, the energy industry has relied on ‘workers’ to complement core staff teams to deliver projects within the industry. Market forces and the cyclical nature of the sector have also led to a huge increase in self-employed ‘workers’.
IR35’s origin dates back to the year 2000. The original intent was to ensure that ‘workers’ were in fact genuine contractors and not simply disguised employees, avoiding tax and national insurance payments.
A good way to think about a genuine ‘worker’ would be to consider the tradesperson who comes to your home to fit a new kitchen. They will inevitably tell you when they are coming, they will tell you how the work will be done, and they will tell you the price. You can of course refuse and select someone else. They can send other people to do the work, if they so wish. They get paid when the job is done. As they are the expert, they will supply their tools and you are unlikely to supervise them or control their work. It is fair to say in most sectors that this intent has not been the reality.
In 2017, reforms were introduced in relation to IR35 for the public sector. Many public sector organisations took a blanket approach to suggesting that every new hire was within the scope of IR35 and that each of them must be engaged on a contract of employment, paying tax and national insurance contributions. As a result, the public sector has experienced an exodus of “workers” from organisations such as the NHS, where ‘workers’ have opted to seek employment elsewhere, leaving in droves, typically to the private sector, rather than convert to employee status.
The IR35 reforms which are due to come into effect on 6 April 2020 in the private sector, will take the standards of compliance to the next level.
There will be an exemption for small businesses that do not meet two out of three of the following requirements; the company has a headcount of more than 50 employees, annual turnover of above £10.2m and a balance sheet greater in value than £5.1m.
The key change to the rules, when they come into effect, is the need to determine the status of every worker in the business. This will be a challenge as there is no robust system in place to assess this. HMRC offer a ‘CEST’ evaluation tool for these purposes on their website but caveat the offering with the fact that they do not have to agree with the outcome of their own tool.
HMRC will not be interested in how companies say that they comply with the regulations, they will be more interested in how things actually work in practice.
Experts in IR35 will be able to take a good stab at developing a status determination assessment, which will consider all of the factors that determine whether someone is an employee or not. This assessment should include lessons from case law.
In an industry where many companies supply resources to their clients or ‘end users’, it is critical that we understand where the responsibilities lie.
The responsibility to deduct tax and national insurance will be with the company who pays the person.
If we take a service company supplying ‘workers’ to an end user or client, the responsibility for determining status, ultimately lies with the end user and not the company paying the person. If the end user fails to determine the status and provides details of their decision, including reasons, to the worker and the supplying company, the end user may be liable for the tax and national insurance of the worker.
This raises the point that whilst your company may be exempt, if the clients you supply workers to are not, then this inevitably brings you into the process.
If the worker and/or supplying company disagree with the status determination, they may appeal to the end user. The end user must respond to the appeal within 45 days. If they fail to do so, the liability for tax and national insurance may lie with them.
The current misconception in our industry is that the contracting companies will do the assessments so clients can rest on their laurels. The end user relying on their supplier companies to assess, could lead to serious commercial consequences.
In reality, it will be very difficult for the end user to assess workers provided by other companies. There needs to be some collaboration between the suppliers of workers and their clients to ensure compliance. Contracting companies and agencies will not fare well if their clients end up picking up the tab for the tax and national insurance contributions of their workers.
Many of the factors that bring someone into the scope of IR35 are working practices – we don’t treat ‘workers’ in the Energy sector like we treat the tradesperson who comes to our home. There may be a chance to change the way we work, in order to secure that worker that you simply cannot do without. This will require a huge shift in mindset, erasing the way we have worked for decades. We would have to make the tradesperson scenario become the norm.
April 2020 may seem a far way off, but depending on the number of contractors you have to assess, and the fact you may have to replace some with employees, there are months of planning and preparation ahead.