As many are aware, soon the widely discussed IR35 legislation will come into effect. This article has been written as an overview on the subject, along with guidance regarding the options available within Colleague 7 to support the required process changes.
Please note: None of the below is intended as legal advice. If you require legal counsel, please seek advice from a qualified solicitor to determine your position on this matter.
What is IR35?
As of 6th April 2020, the IR35 legislation (off-payroll working rules) will come into effect, applying to contract workers who are operating as a limited company working for a third party to provide specialist services to a client.
Leading up to and from then on, contractors must be categorised by the end client as either ‘Self-Employed’ or ‘Employed’ (previously a distinction left to the contractor). This decision will determine the Tax and NI contributions the contractor will make and how an agency would process these contractors from a Back Office perspective.
Who Does This Affect?
Contractors that are deemed ‘Employed’ working for Companies which meet the below criteria:
- An annual turnover of more than £10.2 million
- A balance sheet total of more than £5.1 million
- More than 50 employees
How Does HMRC define ‘Self-Employed’
HMRC use the below criteria to distinguish whether a contractor is self-employed or employed:
- Control – Does your client determine what you do, and how, when and where you complete your day to day work?
- Personal Service – Are you required to carry out the work yourself, or can you send someone in your place?
- Mutuality of Obligation – Is your client obliged to offer you work, and are you obliged to accept it?
What Does the End Client Do?
The end client will likely establish their own process for assigning status or they can carry out their assessment using this online government tool: https://www.gov.uk/guidance/check-employment-status-for-tax
A more simplified view is that a contractor should be deemed as ‘Employed’ if they are being treated as a full-time employee, or receiving the same benefits as a full-time employee.
What if the Contractor is Deemed ‘Employed’?
Contractors that are deemed employed will be ‘Inside IR35’ and need to Pay Tax and National Insurance contributions similar to a Permanent employee.
What if the Contractor is Deemed ‘Self-Employed’?
If a contractor is working outside IR35 (i.e. they are operating legitimately as a contractor and are being paid by their limited company) they will have the responsibility of ensuring that they are paying the right amount of NI and Tax on the money that they receive and will not be subject to PAYE by the contracted employer.
How Does This Affect The Recruiter?
Failure to understand the ‘Employed’ or ‘Self-Employed’ status determination made by the client, and to pass on the status issued by the client to the contractor, could result in the Recruitment Agency carrying the liability for Tax and National Insurance contributions. So it is key to the Agency that they have an established process with their clients on how & when they determine a Contractor’s status and where the outcome of that decision is stored in the CRM.
What Are The Key Points To Cover?
- Firstly, businesses will need an established process for how they handle the status assignment of a Contractor:
- We would suggest there be some form of easily referenceable audit trail to verify that an agreement exists, whether that be a contractual clause referencing the process, Terms of Business update or recorded correspondence.
- There will need to be an agreed method with which you request the status of the Contractor.
- The client may have their own established approach for determining a Contractor status (or a blanket rule which they have taken to mitigate disruption)
- A conclusion may be submitted in the form of a ‘Status Determination Sheet’, listing responses to each of the key questions (as listed in the section above: ‘How Does HMRC define ‘Self-Employed’) or using similar wording to the same effect.
- Alternatively, the agency may issue a simple list of questions to guide the client through the process of determining ‘Self-Employed’ or ‘Employed’ status.
- There should be an established way of tracking whether an agency has requested the status of a Contractor.
- There should be a way of seeing whether a request is outstanding, or when the response was received and the outcome.
- There will need to be a way of tracking the agencies relay of this status to the Contractor.
- Click here for more details from the Government website
- The Agency is required to provide a ‘Key Information Document’ to the Contractor. When this document is provided will depend on the Agency’s own process, but as a minimum at the point of Offer/Placement an overview document covering the terms of the placement needs to be sent to the Contractor.
How Can Colleague 7 Help To Answer These Points?
- Users of Colleague 7 will be able to utilise Letter and Email Templates to uniform their correspondence in relation to ‘Status Requests’. All email correspondence will be tracked as history against associated records and documents can be created on request (using merge fields).
- Checklists can be used against the Candidate, Requirement, Applications (Requirement Candidate) and Offer/Placement
- With a checklist you can track that certain tasks are outstanding against that record. We would recommend that you use this feature to track when a ‘Status Request’ has been made to the end client and when that response has been received.
- Click Here To Watch a Video on Checklists
- If you wish to prevent a Placement from being fully processed by the Back Office team unless all required Checklist items and/or details in respect to IR35 have been met, we would recommend adding a custom field to the Placement record and making this a mandatory field.
- Creating a mandatory custom (Yes/No) field on a Placement will prevent a Placement from being 2nd level authorised.
- Click Here To Watch a Video on Mandatory Fields
- We also intend on adding settings to Checklist items to prevent workflow from being run (updates on this can be expected in Q2 2020).
- Users will also be able to use the ‘Checklist Activity’ report to list all of the outstanding checklist items against all Placements.
- Many users will already have their own contract documents which they create from a Placement record. The ‘Key Information Document’ is an additional template which will need to be created and sent to the Contractor at the point of Placement.
- Download Example ‘Key Information Document’
- Click Here To Watch a Video on Creating/Uploading a Template
- Additional merge fields will be made available to clients wishing to accommodate this template.
- PAYE Margin Calculations.
- Within Colleague 7 (Admin > Lookups) you are able to store ‘Placement Rates’, these are a list of additional rates that you are able to apply to your established Pay & Charge against a contract placement when using the ‘Margin Calculator’.
- The Margin Calculator will contain the additional placement rates as options provided the ‘Payment Method’ (Back Office tab > Payee Details) is set to ‘PAYE’.
- These deductions can then be referenced in the ‘Key Information Document’
- Click Here To Watch a Video on PAYE Margin Calculator (timed to start at 3:30)
Please note: Further updates to this article may be applied over time to cover either updates in legislation or additional enhancements delivered to Colleague 7 to assist with managing this subject.
Any questions please contact the Colleague Support Team.