IR35

 

IR35 Solution

 

 

The Challenge

 

The Chancellor has announced that the Private Sector will be subject to changes to IR35 similar to those already implemented in the Public Sector. Those changes will take effect from April 2020.

 

 Potential Impact on Clients:

 

Private sector companies employing off-payroll workers will have primary responsibility for assessing the employment status (for tax) of the workers they engage. A duty of reasonable care is being placed upon them by HMRC.

 

Essential Consulting Solution:

 

Essential Consulting is a niche Management Consultancy that offers interim project resources and high level consulting skills. It provides solutions to business issues and provides a clearly defined service via a ‘statement of work’ rather than labour. As such, this transfers the obligation to make the employment assessment away from the client and puts it back to Essential Consulting.

 

The IR35 Private Sector changes will not apply to ‘small’ organisations. As a niche consultancy in a specialist sector, Essential Consulting qualifies for ‘small company’ status.
This means that when Essential Consulting provide services to our end clients utilising non-permanent associates (individuals working through a limited company), those limited company associates will still be required to assess their own status for tax on an assignment by assignment basis.

 

The combined effect of the above two points is that Essential Consulting are able to shield their clients from the regulatory obligations imposed by the IR35 provisions.

 

Essential Consulting have engaged specialist legal services to review its contracts and processes and ensure that they are consistent with the regulations when they come into force.

 

Essential Consulting will be engaging with its non-permanent associates in the run up to the introduction of the regulations (and beyond) to ensure that they are briefed on their

obligations and offered any support that may be required.

Consequently, Essential Consulting are able to offer their clients a constructive solution to the IR35 changes which will leave the onus for compliance with the associates.

 

 


Why the changes from IR35 do not apply to us 

 

 

1) Small Business

 

The government have stated that the new rules around IR35 due to come into place in April 2020 will only be applied to medium and large companies that engage contract workers. Small businesses will be exempt from the new IR35 rules.

A small business is defined in the UK (as per the Companies Act 2006) as a company that does not exceed at least 2 out of 3 of the following criteria in the current and preceding year:

• Balance sheet total: £5.1m
• Turnover: £10.2m
• Average employees for small business during the financial year: 50

Essential Consulting are thus defined as a small business and will not be affected by the new IR35 rules.

 

2) Statement of Works (SOW) Provider

 

As a consultancy Essential Consulting provide services via a ‘statement of work.’ This means we perform a clearly-defined piece of work or ‘deliverables’ rather than supply ‘labour.’ As the outsourced statement of works provider, the obligation of employment assessment therefore lies with Essential Consulting and not with the client who engages our services.

As per point 1, as a small business Essential Consulting are exempt from the changes to IR35 rules so any non-permanent associates we engage on a contract basis via a Limited Company will continue to be responsible for determining their own IR35 status, i.e. nothing will change.

 

3) What happens if Essential Consulting increase in size and are no longer classed as a small company?

 

A company which is classified as small in one financial year but ceases to meet qualifying criteria in a later year is only no longer classified as small if it does not meet the qualifying requirements for two consecutive financial years. Furthermore, any change in status does not come into effect until the new tax year. For example, a business that no longer qualifies as small at the end of 31st Dec 2020 would not fall within the new rules until the 2021/22 tax year.

In other words, there would be a significant time lag before any changes come into place. In the longer term, i.e. further than 18-24 months ahead, if Essential Consulting increase in size and can no longer be classified as a small company, as a result of us providing services to clients via clearly defined SOWs, the responsibility for determining the tax status of any Limited Company associates would lie solely with us, not the end client. We have engaged IR35 specialist legal services to ensure our contracts and processes are consistent with non-permanent associates being appropriately classified as outside of IR35.

 

 

Different employment scenarios for change:

 

 

 

 

 

 


Scenario Pros Cons
 
Permanent FTE Zero IR35 risk – perm employees all PAYE
Retention of bank specific knowledge – a permanent change function could be deployed onto different change projects/programmes as needed whilst retaining bank specific skills around internal systems/processes/infrastructure/culture
Inflexible – change/project needs are typically fluid, and a permanent workforce is difficult to ramp up or down. To ramp down in particular, requires complicated or protracted HR process around redundancies. Given that change needs fluctuate, at any given time the permanent change function is likely to be either overstretched or underutilised, making it ineffective for delivering change.
Narrow or generic skillsets/knowledge – different projects/programmes have varying skillset or subject matter expertise needs – a permanent change function by nature will need to be somewhat generic and is unlikely to be fit for purpose for specific project/programme change needs.
Institutionalised/inward looking – reliance on a permanent change function also likely to foster an institutionalised/inward looking approach towards change and a lack of valuable insight into how change is being deployed at competitor firms or lessons learned from similar programmes implemented elsewhere.
Increased responsibility/obligations – Bank is responsible for providing employee rights/protections which comes with associated risks (e.g. tribunals, unfair dismissals etc.)
PAYE costs – bank responsible for payroll costs and Employers NI etc.
Significantly reduced talent pool – the highest quality project/change resources likely to favour contract roles due to associated higher pay, flexibility, variety etc.
 


Fixed Term Contractors Zero IR35 risk – FTCs all PAYE
Very low cost – usually involves just paying a pro rata salary without bonus – therefore lower cost than permanent employees or daily rate contractors/consultants

Significantly reduced talent pool – this is the least favoured option for workers who do not receive the premiums/flexibility associated with contracting yet do not have the benefits/protections of being an employee.
This is likely to lead to inflexibility – while bank can ramp down and let go of FTCs when no longer needed it is likely to be difficult to ramp up quickly for specialised project needs due to significantly reduced talent pool.
Lack of bank specific knowledge – processes, systems, infrastructure, culture


PAYE Agency/Direct Contractors (Inside IR35) Flexibility –can hire contractors specifically for the purposes of that project/programme therefore accessing the most fit for purpose skillsets on a basis that is easiest to ramp up/down as necessary
Zero IR35 risk –all contractors PAYE
PAYE costs – if bank deems engagement inside IR35 it will be responsible for payroll and associated NI costs.
Significantly reduced talent pool – contractor rates will be negatively impacted by being deemed inside IR35, the highest quality project/change resources likely to favour routes that allow them to continue to work outside IR35 or conversely that come with the associated benefits/protections of being an employee.
Lack of bank specific knowledge – processes, systems, infrastructure, culture

Agency/Direct Contractors (Outside IR35) Low cost – direct/agency fees low. If outside IR35 no need to pay contractor higher day rate or PAYE costs. Too high IR35 risk – not a realistic option as almost impossible to ensure all contract engagements would be outside of IR35. Bank likely to be a high-risk target for investigation from HMRC and significant issues/costs if HMRC deems bank has incorrectly deemed contract engagements to be outside IR35

SOW: Large/Big4 Consultancy (weighted towards perm consultants) Low IR35 risk – a properly executed SOW means the consultancy is an outsourced service provider and therefore the ‘end client’ and responsible for determining the workers tax status.
No PAYE costs – regardless of whether an engagement is deemed inside or outside IR35 if the bank is being provided with an outsourced ‘service’ rather than ‘labour’ they are not responsible for any PAYE associated costs
Competitor/wider market knowledge – Change professionals from consultancies are likely to come with knowledge of how change has been deployed on similar programmes with competitors so projects can benefit from lessons learned and up to date change methodologies
Higher costs – Large/Big4 consultants with predominantly permanent workforces come with a significantly higher price tag, especially as they often have high overheads and bench costs when their consultants are not deployed on a project.
Non-fit for purpose skillsets and reduced flexibility– Big4 consultancies are weighted in favour of permanent staff which comes with some of the same drawbacks as having a permanent change function – large consultancies may have a limited bench to choose from and end up needing to deploy consultants who are not fit for purpose or too junior for the needs of the project/programme
Lack of bank specific knowledge – processes, systems, infrastructure, culture
Reduced talent pool – the highest quality project/change resources may favour alternative routes that allow them to continue to work on a contract basis outside of IR35 rather than on permanent basis for a consultancy.

SOW: Consultancy (Boutique/Small – Associate Model) Low to zero IR35 risk – a properly executed SOW means the consultancy is an outsourced service provider and therefore the ‘end client’ and responsible for determining the workers tax status.
No PAYE costs – regardless of whether an engagement is deemed inside or outside IR35 if the bank is being provided with an outsourced ‘service’ rather than ‘labour’ they are not responsible for any PAYE associated costs
Small company exemption – a small consultancy has the added bonus of being exempt from the changes to IR35 so this is an extra layer of protection from the risk of being targeted by HMRC or being liable for any PAYE associated costs.
Competitor/wider market knowledge – Change professionals from consultancies are likely to come with knowledge of how change has been deployed on similar programmes in the market or with competitors so projects can benefit from lessons learned and up to date change methodologies
Flexibility –an associate model allows consultants to be deployed specifically for the purposes of that project/programme therefore accessing the most fit for purpose skillsets on a basis that is easiest to ramp up/down as necessary
Large talent pool – the highest quality project/change resources likely to favour this route given exemption from the upcoming changes to IR35
Low cost – boutique/small consultancies with associate models have lower overheads/bench costs and are typically more cost effective than large consultancies
 Larger number of suppliers – by nature of boutique consultancies being small, if a programme requires a very large number of change resources then the client will most likely need to use multiple small consultancy supplier to meet their needs. Not necessarily a negative however as this could engender greater competition between suppliers and hence even more competitive costs.
Lack of bank specific knowledge – processes, systems, infrastructure, culture

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