Are you managing your off-payroll contracts efficiently?
Regulation changes in April 2021 now mean that the application of off-payroll working rules (IR35) rests with the business rather than the contractor.
Contractors and off-payroll workers often provide services to businesses through intermediary “Personal Service Companies” (PSC). The PSC is typically their own limited company or a partnership/personal service agency/individual and the contractor was previously responsible for determining and paying their taxes within this system. Using this method, contractors could avoid paying the NICs and PAYE they would have had to pay would they have been employed directly by the business.
The rule changes mean that responsibility for determining contractor employment tax status, as well as issuing SDSs (Status Determination Statements) now lies with the business rather than the contractor. The business must also apply any PAYE or NICs to any contractor payments as well as pay employer NICs and apprenticeship levies to HMRC.
This additional business responsibility has brought additional cost, administrative and compliance risks to companies. Both the engineering and manufacturing industries rely heavily on both skilled and non-skilled contracted labour, meaning companies operating in this field have particularly felt the impact of these additional administrative burdens.
Use of Service Providers to Remove IR35 Administrative Burden
Broadly speaking, the IR35 rules apply where the individual would have been an employee for tax purposes had they engaged directly with the business and not through an intermediary or PSC. There are no hard and fast rules for identifying when IR35 applies, but HMRC is closely monitoring any relationship between a contractor and the business who engaged their services. As a general rule of thumb, if the business engaging the services has an element of control over how, when and where a contractor should work, then it is likely IR35 will apply.
An important consideration is that the regulation dictates that it is the intermediary closest to the PSC/Contractor in the contractual chain who must decide if IR35 rules should be applied, as well as carry out the associated responsibilities. This includes assigning tax status and deducting and accounting for tax.
This means that, in the instance where an external company has been engaged to supply overall project services to a business, and these services include third-party contractors and intermediaries, it is the responsibility of the business engaged by the client to manage all IR35 administration for any contractors supplied as part of the project. The services class as having been fully contracted out, including the engagement of any off-payroll workers or contractors, thus removing the IR35 responsibilities from the end client.
– Company A is building a new manufacturing plant
– It engages Project Management Business B to complete the work
– Project Management Business B hires contractors X,Y and Z to deliver elements of its services.
– Project Management Business B is responsible for all IR35 administration for contractors X, Y and Z, NOT Company A.
This does not mean that the IR35 responsibilities go away – companies should be careful in engaging companies offering labour supply only. HMRC distinguishes clearly in the IR35 rules between this and the contract of services of work, taking a dim view of businesses that enter into a contract purely for the supply of labour and avoidance of IR35 administration.
Ascertaining whether the supply of services is “fully contracted-out” and who classes as the client engaging contractor services is often complicated. There is some guidance from HMRC but this is quite complex to follow. Details can be found here.
From April 2022 HMRC is removing the margin of error it has so far afforded businesses and service providers while the new rules come into effect, meaning it is more important than ever before to ensure compliance.
Ensure reduced admin and full IR35 compliance with FEG as your Service Provider
At FEG we take pride in our end-to-end project management service, taking all responsibilities from our clients. This commitment includes our taking on any tasks and accountabilities related to payments of contractors and associated IR35 responsibilities. Our ethical approach to IR35 and your service delivery means that you can count on us to ensure your compliance to IR35, while ensuring the utmost in the provision of quality personnel on any job.
– Inclusion of vetted, qualified and experience Project Management, Engineering and Specialist Contractor personnel within project delivery
– Clear identification of contractor and client relationships, and determination of status of supply of services (e.g. Are they fully contracted-out?)
– Guarantee of compliance to IR35, removing risk from our clients
Contact us for further information on how we can incorporate human resource requirements into our service provision for your project completion.