IR35 rule explained for organisations

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 CRISPS 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?

Smell. Does something ‘smell’ wrong? Even if they are compliant with the above, do you still get the feeling that something isn’t right?

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.

Which organisations are affected?

Any 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 organisations to help assist them in the decision making process which must be used expeditiously on engagement. The organisation will have 31 days to respond to requests from individuals working directly for the organisation before they become liable for paying the tax. 

What do organisations need to do?

Time is of the essence and organisations need to move quickly to satisfy these looming deadlines. Organisations need to start making decisions about who they consider to be inside or outside IR35, and undertake the following as soon as possible:

  • Work with accounts payable to identify all off payroll workers engaged with them directly and indirectly;

  • Negotiate new contracts with all of those they wish to retain taking into consideration the potential increased costs to cover NI contributions, the apprenticeship levy and the tax deductions, as well as the service costs such as VAT, expenses and direct cost of materials; 

  • Terminate the contracts of anyone they no longer require either directly or indirectly through a 3rd party;

  • Decide how to procure off payroll workers in the future and factor in the increased costs to their 2017/18 budgets.

HMRC have released a full report on IR35 which includes information on who is likely to be affected, what actions need to be taken and the penalties which will be enforced against those who fail to comply.

Looking ahead

What is absolutely certain is that things are going to change. Some organisations will stop using off payroll workers and move towards management consultancies and fixed-term contractors to deliver change.  Some career interims will decide not to remain interims and the supply of individuals may decrease. This could mean that some statutory roles can simply not be resourced as demand will outstrip supply. Some agencies will choose not to change the way they provide people to the public sector and will scale back their operations and move towards different markets not currently affected by legislative changes.


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