IR35 in the Manufacturing & Engineering Sector
The October 2018 budget bought confirmation that IR35 rules changes will come into force for “medium” and “large” private sector businesses from April 2020.
The definition of medium and large remains unspecified. For manufacturers, this could impact on the use of off-payroll workers to support things like special projects where project managers, or marketing specialists or other consultants are required. It may also impact on the use of flexible workforce solutions and the use of agency workers. This is because the legislation will impact on the arrangements where any intermediary is used to supply off-payroll workers.
It does not apply where the off-payroll worker is genuinely self-employed. Since April 2017, the public sector e.g. NHS Trusts and the BBC, have been required to examine the arrangements they have with workers who supply their services through intermediaries, including agencies, partnerships and personal service companies (PSCs). Where but for the existence of the intermediary the arrangement would be one of employment, public sector engagers are required to operate PAYE on all amounts payable to the worker either directly or via an intermediary.
The main focus of Government is to extend the current public sector IR35 rules to the private sector. Experience suggests that private sector businesses will require all of the time afforded to them to prepare for the change. Failure to prepare and be ready for April 2020 could result in significant:
- Labour supply issues;
- Business continuity issues;
- Liabilities to tax;
- Liabilities to national insurance,
- And interest and penalties.
The private sector ought to benefit from the lessons learned from the public sector and will have had nearly 18 months to prepare. In particular, companies could take full advantage of HMRC’s online “Check Employment Status Tool” (CEST). However, CEST has caused problems in the past because converting something as subjective as employment status into algorithms, perhaps unsurprisingly, proved more difficult than expected. A lot of work has been done, though doubts about CEST’s reliability remain. One key issue is that the concept of “mutuality of obligation”, an important test in deciding employment status, has been omitted from the tool.
It is strongly recommended that any business paying workers through intermediaries should review their arrangements to assess those off-payroll workers that are:
- Genuinely self-employed;
- Definitely caught by IR35;
- Potentially less certain and require detailed review.
An early intervention to embark on a programme to identify those contracts that are at risk, to plan how to manage any potential changes and ensure that steps are in place to make sure that PAYE is operated where appropriate from 6 April 2020, or introduce required changes, will be essential. Experience suggests that private sector businesses are likely to require all of the extra time afforded to them to prepare for the change. Getting it wrong could result in significant liabilities to tax, national insurance, interest and penalties.
The overuse of intermediaries is a concern to the Treasury, with HMRC estimating as many as 90% of PSCs were failing to operate the rules correctly, costing the public purse £400m. Companies must be prepared for scrutiny ahead.
If you would like to discuss IR35 with us in more detail or if you would like to speak with a member of our team, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with your local representative.
This article featured in issue 4 of our manufacturing and engineering newsletter series. Read the full newsletter here: The Engine – Issue 4