Off Payroll Working - a positive outlook

UK business including both end-hirers and contractors are starting to take notice when it comes to the Off Payroll Working rules being implemented into the Private Sector in a few months’ time which is great to see.

Following the release of the draft legislation on 11th July 2019 which we reviewed here there are a lot more discussions taking place across forums as well as social & business media platforms and we have certainly seen an uplift in the interactions between contractors, agencies and end clients. There have been some great articles produced by key individuals in the market as well as other trusted suppliers and partners. 

One of the things I’m keen to highlight is that it’s not all doom and gloom. Contracting isn’t going anywhere, in fact it is set to grow. However with this upcoming reform, it will of course look a little different for some people.

Despite this reform, the contracting and flexible workforce is predicted to grow in the UK according to Staffing Industry Analysts (SIA). If you are client engaging with Limited Company contractors or a contractor yourself, assuming you have been operating in an Outside IR35 fashion previously then there should be very little difference to you once these rules are put in place.

As per the changes implemented into the Public Sector in 2017, this latest draft legislation for the Private Sector doesn’t veer too much from the course set by HMRC back then and the rules are very familiar.  Despite multiple working groups, significant feedback being provided directly and through the consultation process, it seems a lot of that has been ignored and we find ourselves where we are.

I have put a few words together below linking the reality of what the Private Sector are going to have to understand and the key points taken from the draft legislation.

The importance of getting it right

It is important that clients understand how to make the correct status determination for contractors providing services to them and they do so using ‘Reasonable Care’.

As long as clients have;

• the correct contractor engagement process in place and taken reasonable care in reaching the determination
• a very clear understanding in how to engage with specialist Limited Company service providers compared to their permanent headcount
• no clear control over the worker
• no concept of personal service and certainly no perceived or demonstrated mutuality of obligation

Then following an Outside IR35 status determination being provided, the fee payer in the chain can continue to make a gross payment for services as they always have done with no issues.

Reasonable Care

One of the many important points here is that the client making the determination needs to do so correctly and in most cases they will need a lot of support to understand the legislation and what that means for them. This is the ‘Reasonable Care’ element that was referred to again in the draft legislation released in July.   Although ‘Reasonable Care’ is referenced a lot, there is not a clear definition of what it actually means in practice. It’s pretty sensible to assume that a client making blanket determinations for multiple workers would not pass this test.  Ideally a status determination should be carried out for each assignment on an individual basis, looking at both the contractual elements as well as the working practices that will or are being displayed. 

This is another area where experienced and well respected suppliers and agencies with the knowledge on this topic can really help customers and contractors.

Grey area?

I have spoken above about contractors/service providers who have always operated with an Outside IR35 determination. It’s also important to mention that there will be others providing services who sit in either a grey area or in an Inside IR35 position.  Those operating in that grey area, somewhere between the two, need to start planning which route they want to take. Sitting in that grey area will now be very risky and make it difficult for either clients trying to reach a determination or contractors challenging a decision they disagree with.

Having an IR35 review carried out on your working practices as well as your contractual setup would be sensible in this position. This can and will highlight the areas you need to change to ensure the determination and ways of working are clearly classifiable as either Inside or Outside IR35. 

What if a contractor does not agree with the determination?

The draft legislation contained the anticipated change based on the consultation document, which included the ability for a contractor to challenge a status determination statement that they don’t agree with it. This wasn’t as clear cut as people had hoped however at least from a legislative perspective it puts some structure around what needs to happen and the specified timescales.  The client have to respond to the challenge within 45 days (which seems a very long time given the time critical nature of contract service provision). 

Once they respond to the challenge, if the client believes they have made an incorrect initial status determination, they need to provide an updated status determination statement with the correct determination or if they believe that their initial status choice was correct, they need to respond citing the reasons why they believe it to be correct.

This process in the draft legislation is referred to as the Client-led status disagreement processes.  Usually a process would have a very clearly defined workflow, unfortunately this one does not.

Happy with Inside?

If you are a contractor at the moment and think that most of the assignments that you engage on are going to be determined as Inside IR35 then proceeding with a PAYE solution or through an Umbrella is going to be the best option.  In other articles I’ve mentioned the high level of non-compliance in the Umbrella market with some providers so it’s important for both clients and contractors in the supply chain to ensure they are only trading with compliant providers.  At SThree we run a tender process every 2 years to ensure that we only have compliant providers in place. Our current 5 suppliers are all also FCSA Accredited which is the gold standard for Umbrella Company compliance in the UK market. If you are in the grey area and looking to move over to an Umbrella solution, you retain the flexibility of contracting but gain the employment benefits you may not have had through other structures.

Complex supply chain?

The number of parties or intermediaries in supply chains vary across the UK, some are sector specific for example the Banking sector where the use of a Managed Service Provider (MSP) is common and which provides another layer between the worker and the end client.   The draft legislation states that the End Client in the supply chain have to pass on the status determination statement to the next party in the supply chain, that party then picks up fee payer responsibility until such point as they pass that determination down to the next party. This continues until it reaches the actual fee payer (the intermediary paying the Limited Company, usually the last agency in the supply chain if there are more than one).  

It’s vitally important to ensure that risk is mitigated in the supply chain and that correct payments are made to the Limited Company. This can be achieved by all companies in the supply chain working together to make this process as efficient as possible.  There needs to be a clear channel of communication and even going as far as putting in SLAs through the supply chain to ensure nobody just sits on a determination but it’s passed on again as soon as it’s been received. 

The draft legislation contains the transfer of debt provision as well which I understand to mean that if someone within a supply chain (complex or not) does not comply with the legislation then HMRC can go back to the highest agency in the supply chain (one below the end hirer) and try to obtain the unpaid Tax and NI contributions from them.  The idea behind this is that it should force compliance further down the supply chain from the top as the company will know that it could be on the hook for non-compliance anywhere below in the chain.

What now?

We have spoken about getting it wrong before and it is a risky business so it is important to use this time from now, if you haven’t already started, for everyone to work together to minimise the impact come April. Lots of our customers have already setup internal IR35 working groups with key stakeholders from departments across the business including Finance, Procurement, Operations, HR and Legal.

At SThree, we want to ensure that all of our consultants are highly educated on this topic, that we have a pool of resources and reference material available to answer any questions our customers (both contractors and clients) have, and an engagement strategy on the approach to the go live to ensure minimal impact and avoid a Big Bang change strategy at the start of next year. Our Public Sector experience has meant that we have implemented this reform already into a large contract book and are in a great place to support the Private Sector as a result.

Our PLC status, our Public Sector experience, our compliant contracting models and supply chain partners puts everyone trading with us now or who wants to trade with us in the future in a very good position.

We are hosting some free webinars this week and have limited spaces still available, we would welcome you to attend and help you through this upcoming reform. Please click here to sign up.