ey ir35 reform - december 2016 workshop

IR35 reform – yes it’s reallyhappening!Workshop – 6 December 2016

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

July 2016 ReformofIR35inthepublicsector

Objectives

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

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


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


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)


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.”


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….)


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


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


On-line tool - timeline


2017

25 Feb –public beta

launch

25 Jan –private beta

launch1 April – go

live

Reliance on output???

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


July 2016 Reform of IR35 in the public sector

Challenges

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


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


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


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


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


Workers engaged on an employed basis - either direct or via anumbrella

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


Workers engaged on self-employed basis - either direct or via anintermediary/agency

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


Undertake IR35 status assessment and operate PAYE and NIC for thoseinside

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?


Outsource the IR35 status assessment (and possibly also payroll) to athird party provider

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


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

“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


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.

Action planning


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

July 2016 Reform of IR35 in the public sector

Contact details

Nicola PitcherSenior Manager, EY LLPPhone:020 7951 7198Email: [email protected]

Robert BurtonManager, EY LLPPhone: 020 7951 4160Email: [email protected]

Nick LoganConsultant, EY LawPhone: 020 71979027Email: [email protected]

John ChaplinExecutive Director, EY LLPPhone:020 7951 4654Email: [email protected]

Justin RobertsSenior Manger, EY LawPhone: 020 7806 9317Email: [email protected]


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.


ey ir35 reform - december 2016 workshop

Presentations & Public Speaking