17 February: With less than two months until new IR35 legislation comes in effect in the private sector, employment law expert Mark Hammerton explains end-user options for the off-payroll working rules implementation.

From April 2021, responsibility for determining a contractor’s employment status will switch to the end-user business. If it determines that off-payroll working rules (commonly known as IR35) apply, PAYE and NICs will become the responsibility of the fee payer. End-users who ignore the new rules could end up with significant extra tax liabilities and penalties.

To help organisations and their advisers understand and tackle the potential impact of the rule changes Mark Hammerton, partner in the human resources practice group of law firm Eversheds Sutherland, presented a recent IR35 and employment status webinar (available to ICAEW Tax Faculty members).

Who is an employee?

In the webinar, Hammerton, who has more than 20 years' experience in employment law, used a multiple test with four key indicators to determine employment status:

1. Mutuality of obligation.
2. Personal service – no right of substitution.
3. Control.
4. Other provisions consistent with a contract of service.

“You look at this through a multifactorial lens. So, there isn’t one easy ‘slam dunk’ which decides status, for example, whether a contractor has a right to claim substitution”, said Hammerton.

Employment status depends on the facts so end users need to be aware of relevant case law.

“The law establishes, and I think this is common ground, that you put together all the detail and facts, put them into the mixer and then you take a step back, as would a judge or tribunal, to determine the status of the individual relationship.”

He stressed that determining employment status matters, as for income tax and national insurance contributions (NIC) purposes it is binary – you’re an employee for tax purposes or you’re not. Whereas for employment law rights there are three categories: employee, worker and self employed.

Employment protection

Hammerton explained there is a vastly different array of employment protection rights for different statuses.

Employees: For employment law purposes have the most rights. They have the right to declare unfair dismissal when the putative employer decides he no longer needs the individual. They also get statutory redundancy pay.

Workers: They are in the halfway house category with some rights. For example, they have the right to establish a minimum holiday pay or annual leave under the working time regulations.

Self-employed or independent contractors: They have almost no statutory rights.

End-user/hirer options implementing IR35

Hammerton expressed five options the employer is left with when deciding how to use contractors in the business.

1. An "outright bar": if determining employment status proves too difficult or costly, an organisation could impose a complete bar on the use of any personal services company in its supply chain, such that IR35 will not be applicable.
2. Hire individuals directly and bring them as "express employees" onto the payroll.
3. Treat contractors as employees for tax and NIC, but not for employment rights purposes.
4. Move into a fully outsourced service model where the organisation effectively outsources an activity, product, or service.
5. The use of one or more umbrella companies.

“There is no one silver bullet, no one-size-fits-all. It will depend on your organisation or your client’s organisation”, added Hammerton.

Disputing a decision

If contractors disagree with the decision made by their client on their employment status for tax, they will be able to raise concerns through a client’s status disagreement process. All clients are required to introduce a process from April 2021 to allow contractors to disagree with the decision.

Further support:

• Watch the full recording of the IR35 and employment status webinar (sign up to ICAEW’s Tax Faculty to access the full content).
• Tax Faculty events programme: 2021 webinars.
• HMRC’s Important facts for contractors - off-payroll working rules (IR35).
• HMRC internal manual: Employment Status Manual.
• More ICAEW support on IR35/off-payroll working.