Problems and prospects: the new IR35 rules
Known as the off-payroll rules, IR35 reforms come into force in the UK on 6 April. Michael Paulin, founder of Wolf IR35 Legal Services, explains the implications for telcos and project-based roles
On 6 April – next month – telecoms businesses will face an unwanted challenge. For the first time, the end-clients of self-employed contractors will be required to determine the tax status of those very freelancers on whom they depend.
The dynamism of the telecoms industry has a corresponding fluidity when it comes to human resources. From corporate governance personnel, to in-house recruitment services, to strategy designers and telecoms investment advisors – the range of project-based roles filled by the self-employed is as wide as the telecoms industry is varied. It is perhaps not always the case that HMRC has a perfect working understanding of the reality of the telecoms industry. The international nature of the business relationships that are involved, including the many and varied third-party and quasi-joint ventures that arise, can have a tendency to cause a degree of confusion and consternation in the minds of the perhaps slightly less imaginative of tax inspectors.
The reliance on independent contractors by many telecom businesses is, in many ways, a reflection of this dynamism. Yet, the new legislative changes may apply an unfortunate handbrake to the previously fast-paced and flexible utilisation of human resource.
The new requirement – set out in of Chapter 10 ITEPA 2003 – will require end-clients of independent contractors to issue what are called ‘status determination statements’ (SDS). An SDS must state whether ‘the condition’ – (namely that set out in section 61M(1)(d) of ITEPA 2003) – is or is not satisfied. To answer this question a hypothetical scenario must be considered: if, instead of a contract between the client and the freelancer’s intermediary (which is usually a limited company) there was instead a contract directly between the client and the freelancer herself, would the freelancer be an employee for income tax purposes based on the terms of that hypothetical contract?
HMRC has constructed an online tool, named Check Employment Status for Tax (CEST), which at least seeks to provide a linear decision-tree type assessment of the contractual position and the engagement in question. The issue is, however, that studies show that in at least 20% of cases it is unable to provide a determination whatsoever. The new legislation requires businesses to take reasonable care in assessing the status of such self-employed contractors, yet in certain circumstances they can be left in the dark even where they have sought to utilise HMRC’s own tool.
Another issue concerns the fact that, at best, CEST provides mere guidance. Telecom businesses ought to respond to the challenge by incorporating the IR35 process into their wider tax strategies, thereby ensuring that they can maintain tax efficiencies and continue to utilise contractors – albeit in a streamlined and insured manner. The reality is that contractors want to continue doing business in their own account. In my experience, there has been a degree of cost-sharing involved as both parties come to terms with the new reality. What is essential is that telecoms clients receive the professional support they need in being able to process the status of their contractors in a streamlined and insured way, in order for both parties to continue doing business with one another with clarity and confidence.
It is a cliché, but as people return to the office and the economy reopens, now is the time to take practical steps to prepare for the new legislation. The alternative is for a busy telecoms operator to find itself on the hook for PAYE and NI deductions that no party in the contractual chain ever envisaged would be a commercial reality. By taking steps to ensure that legal advice and technological streamlining can occur hand-in-hand, the reality is that the impact of the new legislation can be robustly minimised.