If you are trying to add to your team right now or are self-employed and contracting with a single company, read on.
I know from conversations with All Things IC’s clients and my Comms friends, that the IR35 off-payroll rules have been causing a lot of headaches.
So I turned to Virginia Hicks, Managing Director at Comma Partners to ask her to write for my blog and share advice.
If you’ve been battling to understand the rules here in the UK, this article will help you. If you’re not in this situation, bookmark this article for the future as I know you’ll find it useful.
I’ve had the pleasure of knowing Virginia for years and I’m delighted to see Andy Macleod has joined Comma Partners as a Director. Comma specialises in internal and change communications, employee engagement and change management. Working across the UK, they resource Interims, FTCs, Permanent Hires, Freelancers, Coaches and Writers.
What is IR35?
According to the Gov.UK website, the off-payroll working rules can apply if a worker (sometimes known as a contractor) provides their services through their own limited company or another type of intermediary to the client.
An intermediary will usually be the worker’s own personal service company, but could also be any of the following:
- a partnership
- a personal service company
- an individual
The rules make sure that workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same Income Tax and National Insurance contributions as employees. These rules are sometimes known as ‘IR35’.
The client is the organisation who is or will be receiving the services of a contractor. They may also be known as the engager, hirer or end client.
Further reading: See the Gov.uk website for information about IR35 and to discover what the rules are.
I’ll hand you over to Virginia…
Self-employed and contracting with a single company? Read on. IR35 affects you.
The change in IR35 (off-payroll) rules was not welcomed by the communication, engagement and change industry which has long been populated by contractors using their own limited companies cover vacancies or maternity leave, support growth and recovery through structural, cultural or process change, or set up and/or develop capability or build new functions..
No-one: interims, hiring companies, or indeed agencies like my own, were impressed when the new taxation regulations were rolled out. Earnings were squeezed for contractors (typically down by 20-25%) and costs were up for clients.
With my Comma hat on, the administration was endless with understanding the regulations, taking professional advice, understanding clients’ various approaches – and they did vary quote a lot – to introducing new processes and talking every day to candidates and clients about the implications.
Why was it introduced?
So, why was ‘off payroll’ introduced if it is proving to be so unpopular? The IR35 term was familiar with contractors as it was first introduced in 2000.
Contractors rarely worried about this tax law apart from avoiding contracts which ran for more than two years. However, many of us were aware of examples where this was abused. I heard several stories of contractors working for one client for in excess of 10 years.
The income for contractors was high so they would not consider a move to permanent status, but the clients could not afford to lose the knowledge from these valued contractors. However, the duration of a contract had in fact no bearing on the status; it was a myth and related more to expenses or rights. And savvy contractors got their contracts reviewed regularly within two years to feel covered.
Meanwhile, for the government, there was the sticky problem of falling revenue from PAYE (Pay As You Earn). Over time, there has been a dramatic shift towards self-employment; from less than one million in 1999 to nearly five million now; that’s around 14% of the working population. The government saw the potential income from the new ‘off-payroll’ regulations which has been as quoted as £1.3 billion which would go some way towards offsetting the drop in PAYE.
Why the old Ways were so Popular?
Originally beneficial tax advantages were introduced for the self-employed because the government wanted to encourage and reward those who were prepared to ‘go it alone’, be entrepreneurial and potentially create jobs.
But over time the government became concerned at the number of people setting up their own limited companies (also known as Personal Services Companies/PSCs), making themselves the sole or main shareholder and contracting and invoicing through these companies.
For any engagement, clients would pay PSCs without being required to deduct income tax or employee National Insurance Contributions as it would for a PAYE employee. Clients did not have to provide rights and benefits to contractors that employees enjoyed like healthcare, pension, paid holiday and redundancy pay. More importantly, clients did not have to pay secondary class 1 National Insurance Contributions (NICs), employer’s NI at 13.8%.
There were several benefits to contractors by billing through a PSC; they claimed expenses which they could offset against pre-tax income while employees had their expenses paid for by their employees. There was a cashflow benefit since they paid corporate tax once a year. Usually, they paid themselves a low salary and the balance of income was earned through company dividends.
Those dividends too were not taxed until April 2016 when contractors were billed for between 5% and 35% depending on the volume of dividends taken. Slowly taxation was eating into contractors’ earnings.
The ‘off payroll’ application means all contractors are now ‘deemed employees’ unless their client determines otherwise with a role assessment. If determined ‘off payroll’, then a Statement of Works is required which clarifies the deliverables in a similar way to how agencies take a brief from a client.
This new approach which must be owned by clients hit the public sector in April 2017 and then the private sector in April 2021.
Initial Impact of the Roll-Out
- Some contractors were resigned to paying PAYE @ 20% and Employees NIC @ 20%.
- Others tried (and many failed) to achieve a day-rate uplift on an on-going assignment to protect their overall take home pay.
- Some large companies deducted the Employer’s NIC off the day rate (not lawful unless done correctly and there are class actions pending to that point)
- Some clients accrued holiday for contractors which further reduced the take-home (although refunded at the end of contract)
- Many clients insisted contractors worked through umbrella companies which involved another (small) charge. I heard from many shocked contractors at the time; one had been on £600 a day and their income dropped to nearer £350 a day after all deductions. A very sudden and dramatic shock to cashflow.
- Others determined that they would only work “outside” these regulations which they did not agree with and felt sure did not apply to them, but these opportunities have fallen to about 30% of those in previous years.
- Some consultancies are hiring contractors to work with them in teams servicing client projects. There is evidence that this is a trend but not as significant as some expected.
There are some legitimate exemptions where contractors can continue to work through their limited company ie where the client is deemed a small company if it complies with the definition in two out of three requirements: has fewer than 50 employees, a turnover of under £10.2 million, and/or a balance sheet of under £5.1m. But beware charities are not exempt unless they comply with these same rules.
And there are anomalies too; we have seen the same role in different companies assessed by clients as outside by one, but inside by another. This confirms that the Revenue assessment tool – CEST – used by many is flawed or at least ambiguous. Several huge government bodies like Work and Pensions have had to pay millions in retrospective tax bills, interest and penalties despite using this government sponsored CEST tool and getting support from the Revenue!
Dave Chaplin, CEO of compliance solution IR35 Shield says: “These government casualties serve to highlight that CEST exposes those who use it rather than provide them with any protection.”
How to assess with confidence
The choice on how to assess with confidence seems clear with clients and candidates turning to professional advisers like IR35 Shield and Qdos for advice, comprehensive and reliable assessment and insurance. We know both organisations and recommend them to you.
How to be determined Outside
To work as a contractor and sit outside the IR35 rules there are guidelines on criteria:
- Take on contained, ie project type work to fulfil a specific, time defined or goal driven need
- Make sure you have no access to employee perks
- Retain flexibility about when and where you work
- Register for VAT and be paid via invoice
- Take out your own indemnity insurance
- There must be no on-going guarantee of work
- Payment can only be for work done not just for being available
- Require a substitution clause by which contractors can supply alternative resource if they are unwilling to fulfil the contracted obligations to a client.
Many candidates have hotly debated these with me and been quite clear that they are always working outside the regulations. But on substitution, I honestly don’t see how it is possible for a communication interim to send a peer in to cover their work. Some clients will commit that this is possible, but I doubt it will ever be tested by them.
In reality, I would expect those clients would wait for their hired interim to return to work or start a new recruitment process. A communications agency can substitute people on an account / project of work and clients will be more flexible about who they work with through an agency. With an interim however, the client has hired an individual for their experience, skills and fit in the team and the culture.
Quoting Dave Chaplin again: “The belief that a substitution clause negates the ‘personal service’ test when examining status is a mistake and myth that has developed over the last 20 years”.
What does this mean for temporary resourcing?
The change in legislation has undoubtedly been a blow to the interim community and for companies who need ‘temporary’ staff.
Faced with these new rules, we are seeing:
- Many contractors/freelancers have become resigned to the IR35 rules despite the loss of income
- Those contractors on long contracts have had to either go permanent, or move on, or start paying the higher taxes
- Clients are paying employer NICs for majority of contractors – about 60% of those hired
- The day rate market is settling but the day rates are not close to covering the loss of take-home from PAYE tax and employees NI
- Contractors consider their day rate alongside tax and NI when they more to new assignments. AS the rollout proceeded in the private sector, most contractors had to accept whatever terms their clients offered as it was a terrible time to withdraw from a contract.
- Some decided to go permanent and lose the flexibility of contract work as there is less clear water between the take home than there was before
- Similarly, an increasing number of senior roles are being offered as Fixed Term Contracts instead of day rate. These contracts have a definitive end date and employees are paid on a salary and have access to company benefits which will vary but often include sick pay, healthcare, holiday pay and pensions. Previously, senior contractors would have resisted these contracts which were worth nearer half the “old” day rate offers.
In 14 years running Comma, we have in four months seen a dramatic shift for contractors and client in resourcing on a temporary basis. Clients must assess the status of a contractor engagement and contractors are potentially in a weaker negotiating position on rates and must pay higher tax through Payroll or an umbrella company. Clients also have to pay the Employers NIC for contractors.
We wonder how the market will adjust if the demand for temporary talent continues; currently there is an upturn underway not seen since 1998.
There is huge recruitment underway for business change both in-house and via specialist consultancies. Perhaps the pressure on talent will drive a further shift as clients compete for temporary communications, engagement and change specialists to drive recovery and growth.
How Comma can help
IR35 regulations are not straightforward.
To help clients and contractors:
- We run our own Payroll rather than immediately send contractors to an umbrella company (many agencies don’t give contractors a choice.)
- We can (informally) assess quickly whether a role is inside or outside. When it is borderline or outside, a formal assessment is essential to get an absolute and reliable ‘reading’.
- We can provide advice on process and costings if we are asked by clients or contractors.
- We offer a flexible contract service for clients and will place people on FTC, permanent, day rate or freelance terms (coaches and writers).
As a final word, even if you have an ‘outside determination’ you need to monitor it as the Revenue are known to retrospectively challenge assessments. Our expert, Dave Chaplin, advises: “We are required to consider status before a contract starts, so it is therefore critical, if a contract is considered ‘outside IR35’, to regularly check the status to see if it has changed and gather evidence during the contract to shore up the original determination.”
Some candidates who are deemed “outside” will get appropriate insurance to ensure they are not exposed by a later assessment which gives another determination. Given the ambiguity out there, there is no doubt that’s a good idea.
Post author: Virginia Hicks, MD, Comma Partners.
Thank you Virginia for sharing your insights and advice with the Comms community.
I hope you found this article useful if you’ve been trying to understand the rules. Do see the Gov.uk website to read them in full and make decisions that are right for your own personal situation.
Thank you for stopping by,
First published on the All Things IC blog 9 September 2021.