What is involved in the status decision-making process?
The key to the process and the starting point for HMRC to police the Off-Payroll legislation will be establishing whether the end client has taken reasonable care in arriving at the status decision and has then fulfilled the requirements of the legislation.
One of the questions asked during the webinar was “what could a contractor possibly do if the client hasn’t taken reasonable care? Other than refuse the role?”
With any piece of tax legislation, the questions should be: “Does it have a foundation?” and “Are HMRC willing to police it?”
In answer to the first question, the foundation stones of the updated legislation – and missing from the 2017 off payroll public sector legislation – are ensuring that:
- reasonable care is taken by the end client in making the status decision
- the status decision is properly passed down the recruitment chain
- there is a “client-led disagreement process” (the freelancer’s opportunity to challenge the SDS decision)
The legislative requirements around this process are designed to make it unattractive for the end client in particular to deviate from the process.
In summary, the end client’s responsibilities are:
- Taking reasonable care about making a status determination
This means understanding IR35 sufficiently to make a decision – and the larger the end client, the more HMRC will expect from them in this regard – and not making the blanket decisions felt to have been prevalent in the public sector, although HMRC deem it acceptable to take a common approach to a role where the terms and conditions and working practices are the same for a number of contractors engaged to do the same work.
- Issue an SDS to the correct parties with an explanation for the decision
A Status Determination Statement must be created and issued to the worker and to the agency below the end client in the contractual chain if there is one. It must contain reasons why the decision has been made – whether inside or outside IR35 – and we believe that it should consider both the contractual terms and working practices, and certainly not be generic.
Prior to the legislation being deferred to next year, we saw an SDS issued, which stated in relation to in-business matters that ‘one or more factors did not apply’ and believe that this was not sufficient to reference the contractor’s circumstances.
- Have a “Client-led” disagreement process
A contractor – but not an agency – has the right to challenge in writing the decision made by the end client. The client must respond within 45 days, giving a ‘reasoned response’.
Where clients have gone about the process correctly, it is difficult to see how the response will differ from the initial decision, but not responding would constitute failure to take reasonable care.
If the end client fails in its duty to undertake any of the above, then the client has not taken reasonable care, and the responsibility for the deduction of tax and NICs and payment of apprenticeship levy and paying these to HMRC is the client’s.
This is the case even if another party has already made deductions in line with the original determination. Corrections for that other party can be made as the client will be required to meet the liability.
Whilst the penalties for the end client are draconian, this may still not satisfy the webinar attendee’s question and so we move to the issue of policing the legislation.
No-one yet knows how HMRC will undertake their compliance work, although with these requirements to take reasonable care, it makes sense that HMRC will start with the end client engager. If HMRC conclude the end client has complied with its legislative responsibilities and taken reasonable care, but do not agree with the decision reached, then the fee payer – if the end client is not engaging the PSC directly – would be the next call as they will be responsible for the liability.
So, will HMRC have better success in policing IR35 than they did in investigating individual contractors for 20 years?
Time will tell, but HMRC’s pronouncements about not focusing on retrospective enquiries and the need to ensure the new legislation is effective, suggests that there is an enthusiasm to make the off payroll legislation work in the private sector.
Indeed, after 20 years of IR35 only producing an estimated 10% of engagements as being declared inside – as per the Government’s own estimates – arguably HMRC are in the last chance saloon to make this work.
Whilst we will not naively suggest that there will be perfect compliance with the legislation, there are a couple of very good reasons why end clients and recruitment agencies need to take this new framework very seriously.
Other SDS-related questions
Once a contractor has appealed and as long as the client has responded within the allotted decision and offered a reasoned response, your appeal process has ended and your choice will be to accept your fate or seek work elsewhere.
There is no right to appeal to HMRC other than requesting your Self Assessment Return is amended because you believe you have paid too much tax. An HMRC enquiry is likely to follow and if that finds that you have paid the right amount of tax, you can expect a penalty on the basis that you sought to claim tax that was not due to you.
A couple of people touched on the position where they disagree with the client and one of these referenced that he and his client got differing answers when they used HMRC’s check of Employment Status for Tax (CEST) tool.
This comes as no surprise, as the CEST Tool can be manipulated depending upon the answers given.
The only thing you can do is speak to the client and establish where the differences lie and see if they can be resolved. But if, for example, you believe that you can send a substitute and the client disagrees, then chances are that the client’s opinion will hold sway.
Umbrella companies and IR35
Umbrellas can be engaged by end clients, but typically they sit in the contractual chain below a recruitment agency.
Umbrellas have always fulfilled two main functions:
- a means of paying contractors where an agency did not want to set up their own PAYE department to pay workers;
- and often the vehicle used by freelancers who wanted to take a first step into contracting, but didn’t want to go straight into setting up their own company.
Umbrella company workers are all employees of the umbrella and paid under PAYE. The umbrella will take a margin from the fee paid by the agency with the balance of paid to the worker after statutory deductions such as Employers NICs, apprenticeship levy, pension deductions.
The Umbrella is the individual’s employer and the individual accrues the same employment rights as you would in a permanent job.
As many engagements are linked via an agency to a particular umbrella or choice of umbrellas, the workforce in an umbrella is usually quite transient and it would not be a surprise to find yourself working through a number of umbrellas in any one tax year.
In answer to one of the queries, Markel Tax can assist with the setting up of a compliant umbrella; please contact 0345 223 2727 for more detail.
Look out for part five, of this five part guide, on the IR35 Hub soon.
For IR35 consultancy services please contact Markel Tax on 0345 223 2727.