IR35 rule explained for contractors
Under the IR35 rule public sector organisations will have to assess every worker that performs (professional services) to ensure they pay the correct level of tax. Historically, the personal service company (PSC) through the support of their accountant, would decide the appropriate levels of tax to pay. Now with the IR35 rule that comes into effect from April 6th 2017, the responsibility will fall to the public sector body that requires the services.
If earnings are acquired before the new rule start date and invoices are submitted after, the new rule will apply. Therefore, organisations should begin to make decisions about who they consider to be inside or outside IR35 as soon as possible. This is where the CRISP test comes in and here are the key indicators of the test when considering employment status.
We spoke to Caroline Jones, Tax Director at PwC, who highlighted the key indicators used to test IR35 status which she describes as the CRISP test in our video.
Control. Is the Public Body providing direction or supervision of this individual? Are they being micro-managed, given tasks to perform, and are they subject to performance reviews?
Risk. Is it possible for the individual to make a profit or a loss, what is the financial risk?
Integration. Is this individual part of the organisation? Do they have a company email address, telephone number, are they able enter the organisation using a company pass and do they feature in the organisation’s structural chart?
Substitution. Can an individual genuinely substitute themselves without authorisation from your organisation? If they have substituted who did the organisation pay – the original PSC or the substitute?
Provision of owning equipment. Can this individual supply their own equipment such as a laptop or phone, or do you provide it for them?
Taking on the burden of assessing the status of every individual worker engaged through an intermediary is for many, simply not an option. Most clients we have spoken with are likely to enforce a “catch all inside IR35” approach, forcing all appropriate workers towards PAYE. If an individual feels they have been wrongly assessed they will need to seek confirmation from HMRC before their status will be changed.
What type of workers are affected?
Contractors that work within a public sector organisation (defined as a public body that is subject to freedom of information requests, or the sub division of a parent who is subject to them) will be affected. This could be where an individual is engaged via a limited company, a partnership, or an intermediary like a recruitment agency.
A tool or test will be available for contractors to assess their IR35 status which will assist organisations in the decision making process. This must be used expeditiously on engagement and organisations will have 31 days to respond to requests from individuals working directly for the organisation before they become liable for paying the tax.
The landscape now
What is absolutely certain is that things have changed. Some organisations have stopped using off-payroll workers and moved towards management consultancies and fixed-term contractors to deliver change. Some career interims have decided not to remain interims, and the supply of individuals has decreased. There are statutory roles that can simply not be resourced as demand has outstripped supply. Also, a few agencies have chosen not to change the way they provide people to the public sector and have scaled back their operations to move towards different markets not currently affected by legislative changes.