ey ir35 reform - december 2016 workshop
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IR35 reform – yes it’s reallyhappening!Workshop – 6 December 2016
Page 2
Agenda
► Introductions► Objectives► Background► Overview of 5 December announcements► On-line tool► Challenges► What we are seeing► Solutions / models► Action planning► Questions
December 2016 IR35 reform
Page 3 July 2016 ReformofIR35inthepublicsector
Objectives
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Estimated “cost” of non-compliance
Government estimates:
Only 10% of PSCs who should be operating IR35 are
Budget 2016 cost to the Exchequer in 2016/17 - £440m
20,000 non-compliant PSCs in public sector
Autumn Statement 2016 – additional tax receipts2017/18 - £25m (falling to £20m in 2018/19)
December 2016 IR35 reformReform of IR35 in the public sector
Page 5
Background
► Legislation introduced 2000► Summer Budget 2015 – Government intention announced► Discussion document – 17 July 2015► Formal consultation document – 26 May 2016► Autumn Statement 2016 – confirmed 6 April 2017 start► Issued on 5 December:
► Response to consultation► Draft legislation FA 2017► Guidance
► On-line tool – in the public domain from end Feb 2017► Implementation 6 April 2017 – public sector only
December 2016 IR35 reform
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The proposals
► With effect from 6 April 2017► Responsibility for operating the rules moves from the
individual worker's personal service company to:► public sector body,► agency,► third party
paying the worker’s company► Public sector - as set out in the Freedom of Information
Act 2000 and the Freedom of Information (Scotland) Act2002
December 2016 IR35 reform
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Overview of draft legislation – Chapter 10
► Introduces concept of “fee payer”► The person paying the PSC – is the employer for PAYE/NIC► Or first intermediary onshore if payer is offshore
► Public sector body required to inform the person theycontract with whether or not contract is within IR35► Written request if not forthcoming (can include request for
reasoning)► Public sector becomes the “fee payer” if not received in 31 days
► Specifies “deemed direct payment” calculation► Deemed direct payment excluded from IR35 deemed
payment calculation by the PSC► 5% expenses deduction removed (public sector only)
December 2016 IR35 reform
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Overview of draft legislation
► If the PSC or associate provides a fraudulent document –the PSC becomes the “fee payer” and responsible forPAYE and NIC.
► Fraudulent document - intended to constitute evidencethat “outside of IR35.”
December 2016 IR35 reform
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Overview of guidance
What we would like to see:► Evidential requirements – little mention► Substitution – may come with the tool in due course?► Control – may come with the tool in due course?► Composite services / outsourcing – not intended to apply
to fully outsourced services (Janet e.g.)► Liability – √► Status of the on-line tool – reliance/disagreement – not
mandatory► Interaction with individual’s SA return – report as
employment income on SA return (but may disagree….)
December 2016 IR35 reform
Page 10
Overview of guidance
Some helpful bits:► Stakeholder pensions, statutory payments and certain
other employment rights do not apply!► Takes precedence over CIS► Fee payer operates RTI via payroll on net of VAT amount► Further guidance on RTI and tax codes to follow….► The fee payer is responsible for ‘ers NIC and
Apprenticeship levy
December 2016 IR35 reform
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Consultation response – some furthercomments
► 188 responses!► Government does not perceive any impact on flexibility in
labour market – just enhanced compliance► Urgent reform needed to protect the Exchequer► No extension to private companies carrying out public
functions► Mention of guidance on what information end clients will
need to provide to intermediaries► Gateway tests not to be used – instead use the tool
December 2016 IR35 reform
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On-line tool - timeline
December 2016 IR35 reform
2017
25 Feb –public beta
launch
25 Jan –private beta
launch1 April – go
live
Reliance on output???
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On-line tool overview
► HMRC’s view of status► If data is correct can rely on the outcome► Do not have to use it or agree with the outcome► Can be used by end user, intermediary or contractor –
scope for disagreement!► Can be used by private sector and self-employed
individuals► Matrix approach► Initial filtering if pass the substitution or control test► Future and current contracts
December 2016 IR35 reform
Page 14 July 2016 Reform of IR35 in the public sector
Challenges
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Impact on contractor “take home”
Contract revenue £100,000
Salary £11,000
Pre 6 April 2017 – net £68,117
From 6 April 2017 – net £59,356
Revenue required to retain net £120,000
2016/17 tax and NIC rates used
December 2016 IR35 reform
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Challenges – our thoughts
► Timing► Outsourcing / private sector providers► Obtaining data for the assessment► Cost and resource implications
► Contractor relations► Un-level playing field / loss to private sector► Budgetary constraints
► Employment law risk► Payroll► Interaction with individual’s personal tax position
December 2016 IR35 reform
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What we are seeing
► Lack of preparedness due to tight timeframes► Move to private sector?► Move to employment?► Significant concerns around the adequacy of the on-line
tool► Increasing interest / uncertainty in private sector
December 2016 IR35 reform
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Solutions – possible business models
► Full employment► Self-employment► Assess IR35 status and payroll
► In-house► Outsource (assessment and/or payroll)
► Intermediary in the contractual chain► Deemed employment model
December 2016 IR35 reform
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Full employment
Advantages► Certainty► Minimises PAYE and NIC risk► Straightforward► Removes cost and resource
required around statusassessments
Disadvantages► Increased costs of employment► Contractor’s unhappy► Reduced flexibility in workforce► Process, policy and contractual
change
December 2016 IR35 reform
Workers engaged on an employed basis - either direct or via anumbrella
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Self-employment
Advantages► Avoids pay-rolling► AWR and other employment
obligations and rights avoided► Retains workforce flexibility
Disadvantages► Still need to make a robust
status assessment► Process, policy and contractual
change► PAYE and NIC liabilities if
assessment is wrong/evidenceis weak
► Care around employment rightsneeded
December 2016 IR35 reform
Workers engaged on self-employed basis - either direct or via anintermediary/agency
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Assess IR35 status – in-house
Advantages► Genuinely “self-employed”
contractors can continue tobenefit from PSC structure
► Workers who are caught byIR35 may move to moreappropriate structures (e.g.umbrella)
Disadvantages► Resource and expertise needed► Process, policy and contractual
change► PAYE and NIC liabilities if
assessment is wrong/evidenceis weak
► Care around employment rightsneeded
December 2016 IR35 reform
Undertake IR35 status assessment and operate PAYE and NIC for thoseinside
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Assess IR35 status – outsource
Advantages► Benefit from expertise► Opportunity to build in insurance
backing► More in-depth scrutiny of
uncertain / borderline cases toreach correct decision for eachworker (as opposed to defaultPAYE for example)
Disadvantages► Possible additional cost► Adequate due diligence needed► Degree of policy and process
change► Contractor resistance?
December 2016 IR35 reform
Outsource the IR35 status assessment (and possibly also payroll) to athird party provider
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Intermediary in contractual chain
Advantages► Responsibility for the IR 35
assessment and for payrollremoved
► Benefit from expertise??
Disadvantages► High degree of MSC risk and
transfer of debt► High level of due diligence
recommended► Process, policy and contractual
change► Contractor resistance?► Additional cost of intermediary
margin
December 2016 IR35 reform
A third party provider will contract with the agency/end client to providethe services of the PSC and will pay the PSC and take responsibility forthe IR35 assessment and operation of PAYE and NIC
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“Deemed employment” model
Advantages► No IR35 status assessment
needed► PAYE and NIC accounted for
Disadvantages► Model may not be viable due to
FRV changes from April 2017► Employment law risk► Reputational issues► HMRC dislike► High level of due diligence
recommended
December 2016 IR35 reform
An intermediary invoices the end-client/agency on behalf of the PSC. Allincome is paid out of the PSC via the intermediary as employmentincome with full PAYE and NIC operated (i.e. no dividends paid). Flatrate VAT scheme generates income in PSC to fund accountancycharges.
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Action planning
December 2016 IR35 reform
6 April 2017
Current stateanalysis
Processand policydesign
Go-livePostimplementationreview
Identifycontractors inscope
Impact/riskassessment
Identify keystakeholders
Engageprofessionaladvisers
Determine andassess options
Draft and roadtest policy
Systemschanges
Communicateand train
Supplier duediligence
You have ready:
Policy
Process
Systems
New contracts
Trained staff
Policies andprocessesoperating asplanned?
Include thirdparty providers
Test staffunderstanding
Page 26 July 2016 Reform of IR35 in the public sector
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Contact details
Nicola PitcherSenior Manager, EY LLPPhone:020 7951 7198Email: npitcher@uk.ey.com
Robert BurtonManager, EY LLPPhone: 020 7951 4160Email: rburton@uk.ey.com
Nick LoganConsultant, EY LawPhone: 020 71979027Email: nlogan@uk.ey.com
John ChaplinExecutive Director, EY LLPPhone:020 7951 4654Email: jchaplin1@uk.ey.com
Justin RobertsSenior Manger, EY LawPhone: 020 7806 9317Email: jroberts4@uk.ey.com
December 2016 IR35 reform
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Legal notice
The information in this presentation pack, and the accompanying recording of thepresentation, is solely for information purposes and is not to be relied upon byany person or entity as accounting, tax, regulatory or other professional advice.The material here and the EY oral comments made in the accompanyingpresentation should be considered together. If you require any further informationor explanations, or specific advice, please contact us and we will be happy todiscuss matters further.
The views expressed by presenters are not necessarily those of Ernst & YoungLLP.
December 2016 IR35 reform
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