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Savant - A Guide to Off-Payroll Reforms

 

1. Introduction

Reforms to off-payroll (IR35) rules in the private sector are due to come into effect in April 2021. They will mean that the responsibility for determining a contractor's IR35 status and ensuring the correct taxes are paid, will switch from the contractor to the end hirer.

 
 

2. Responsibility & Liability

As you can see, the new rules come with significant compliance and tax risks for end hirers and agencies. The agency is the first port of call for HMRC should a successful challenge be made to an 'outside IR35' status assessment.

Current Rules: The contractor is completely responsible for working compliantly and paying the correct taxes.

  • If a contractor undertakes an 'outside IR35' limited company assignment, the contractor's limited company is paid a gross rate by the agency.
  • This money can be withdrawn from the contractor's company in a very tax-efficient manner using salary, expenses and dividends in accordance with HMRC rules.
  • If the assignment is later judged not to be outside IR35, the contractor will be liable for all of the unpaid tax plus any penalties and interest levied.

New Rules: The end hirer is responsible for IR35 assessment but the agency is liable in the first instance for the payment of unpaid taxes should HMRC successfully challenge the assessment.

  • The end hirer now has responsibility for deciding the status of an assignment - whether it is 'inside' or 'outside' IR35.
  • They will have to issue what is known as a Status Determination Statement (SDS) to the agency and to the contractor.
  • If the end hirer issues an 'inside IR35' SDS then they have complied with their obligations. If an agency (and any other agencies in the supply chain) then ensures that the contractor is paid via PAYE and taxed as a normal employee (e.g. via a compliant Umbrella company) then there is no liability or risk for anyone.
  • If the end hirer issues an 'outside' IR35 SDS, Savant offers a number of options which are designed to mitigate potential risk if the status is successfully challenged.
 
 

3. How can Savant help?

Savant is offering a holistic solution - we can help you obtain insurance-backed assessments for a sample of or the whole of your contractor workforce and provide support on a continuing basis.

Insurance-Backed Assessments
The least disruptive approach for agencies and end hirers will be to put in place strong assessment processes so that Professional Service Contractors (PSC) can continue to be used where appropriate and alternative contracting and payment options (ie PAYE/Umbrella) used for assignments which are inside IR35.

To facilitate this compliantly and with assurance to end hirers and agencies, we have developed insurance-backed IR35 assessments to provide assurance to end hirers in continuing to use PSC contractors under the new rules.

  • The comprehensive questionnaire takes just 10 - 15 minutes to complete and includes all recognised status tests.
  • There are free text fields enabling the contractor to provide further information and context. This ensures each engagement is assessed in its entirety.
  • The tool will not generate inconclusive results - it will always make a justified decision on borderline cases. The digital platform provides all parties with complete transparency and requires minimal administration, reducing cost and resource burden.

The Assessment Process

Inside IR35 Solutions:

  • PAYE - Similar to permanent employment in terms of tax but without the benefits. Makes limited company set up redundant. Costs can be more expensive as employers NI & pension needs to be factored in. Contractor may ask for additional tax burden to be covered through an uplift in rate.
  • FTC/Umbrella - Can work as a compromise between contract and permanent hire. However, it can be harder to find resources willing to work in this way. Lacks the benefits connected to permanent roles or uplift you see on contracts through Limited Company. Workable if the salary on offer sits between permanent salary and a contractor rate. The individuals need to work through umbrella company under this scheme.

Commercial risk - costs increase/talent is lost - Where contractors have been used to being paid and fulfilled using the outside IR35 limited company route and these change to having to be paid via PAYE, i.e. taxed as an employee, the cost of employment is greater and the contractor will face a higher tax bill on the income they receive. The table below represents a PSCs daily rate (outside of IR35) and how this is affected when moved to different Inside IR35 models.

 

Original Rate
(outside IR35)
Inside IR35 Rate
(to match current limited take home)
Inside IR35 Rate
(Contractor's rate subject to no uplift)
PAYE Rate
£350 £415 £268 £409
£400 £470 £309 £467
£450 £525 £350 £526
£500 £580 £390 £584
£550 £630 £431 £642
£600 £685 £472 £701

 

Outside IR35 Solutions:

  • Statement of Work - A statement of work (SoW) is referred to as the narrative description of a project's work requirement. It defines project-specific activities, deliverables and timelines for a vendor providing services to the client.
  • Contract for Services - A contract for services is a formal, legally binding agreement before a business and a self-employment individual.
  • Assessment & Insurance - Both a Contract for Services and a Statement of Work need to be assessed and insured.
 
 

4. Summary

If you wish to continue using PSCs, you can do so safely with insurance-backed assessments, subject to assessment tool judgement. This allows you to maintain competitive advantage where possible whilst also protecting against risk and liability.

If you have contractors who are deemed to be 'inside' IR35, or if you do not wish to take on the risk associated with PSC contractors, you can continue to benefit from a flexible workforce by using compliant, FCSA-accredited Umbrella service. This mitigates compliance risk and removes future liability.

'Outside IR35' decision

All potential contract roles will be assessed using a reliable, insurance-backed assessment tool, agreed between the parties. That way, all parties can be sure the 'outside IR35' determination is safe and the liability is insured.

'Inside IR35' decision

Pay workers via a compliant PAYE or umbrella model but ensure full visibility with all workers going through one compliant supplier engaged near the top of the chain.

 
 

5. What do I need to do now?

Please contact us to find out more and to discuss your options.