This guide seeks to give an overview of three important and sometimes complex areas that potentially govern your pay, terms and taxation. This includes IR35 governance and Opt Out rules.
The three areas and are:
The determining factor in the deciding if the first two sets of rules (AWR and IR35) apply, is the nature of the relationship between you the individual providing the service and the hirer. In essence, the more the relationship looks and feels like one of employee and employer, the more likely these rules are to apply. It makes sense that employment carries many valued rights and responsibilities, so the more this kind of relationship is created, the closer your tie is to the hirer and the greater their obligations are in return.
In both cases, for the purposes of determining if the rules apply, the agency can be ignored for the most part. The relationship concerned is the one between the employer and the service provider themselves.
In the case of the third set of rules, the conduct regulations, these apply to all agencies and the individuals that they work with. They are relevant here as there is some relationship with the IR35 rules, which we feel is important to explain.
AWR has a relatively straightforward test. If you are working via an agency, just ask, am I subject or entitled to supervision, direction or control by someone at the hirer? If so, the rules apply to you.
These rules, very broadly entitle you to be paid no less than a permanent peer and affords you the same rights to conditions such as holiday and preferential shifts.
Full details of the rules are set out below:
IR35 governance of the operation of PAYE on income paid to a temporary worker. IR35 has a much more detailed assessment of the worker / hirer relationship and a more rounded set of factors than the AWR test needs to be considered.
First and foremost, you need to consider if there specific need for your personal service. This means if it does not matter to you who turns up to do the role, then you or your limited company or partnership does not fall into the initial definition of an intermediary for the IR35 rules and the rules do not therefore apply.
Once you have established that there is a requirement for personal service, you need to consider other factors to decide if you hold a ‘hypothetical employment contract’ with the hirer. When making this assessment you should remember to look at the picture as a whole. Some of the factors carry more weight than others with HMRC but there is no one deciding factor. The key factors are;
It is a feature of employment that the hirer has the right to tell the worker what to do or where, when and how it is to be done. The extent of control may vary. A hirer will probably exercise more control over an unskilled worker than over a skilled craftsman. However, a working relationship which involves no control at all is unlikely to be an employment.
Employees tend to be paid a fixed wage or salary by the week or month and often qualify for additional payments such as overtime, long service bonus or profit share. Self-employed workers on the other hand, tend to be paid a fixed sum for a particular job.
An individual who risks his own money by, for example, buying assets and bearing their running costs or paying for overheads and large quantities of materials, is almost certainly self-employed. Financial risk could also take the form of quoting a fixed price for a job, with the consequent risk of bearing the additional costs if the job overruns. However, this would not necessary mean that the worker is self-employed unless there is a real risk of significant financial loss.
A person whose profit or loss depends on his capacity to reduce overheads and organise his work effectively may well be self-employed. People who are paid by the job will often be in this position.
Employees are often entitled to sick pay, holiday pay, pensions, expenses and so on. However, the absence of those features does not necessarily mean that the worker is self-employed, especially in the case of short-term engagements.
A right to terminate an engagement by giving notice of a specified length is a common feature of employment. It is less common in a contract for services, which usually ends only on completion of the task, or if the terms of the contract are breached.
Long periods working for one contractor may be typical of an employment but are not conclusive. It is still necessary to consider all the terms and conditions of each engagement. Regular working for the same hirer may indicate that there is a single and continuing contract of employment.
Examples of behaviours that suggest being part and parcel of the organisation would be if the worker is scheduled into future plans of the business, they are a key member on an ongoing assignment, that they have supervisory responsibilities for other members of staff.
If there is a reciprocal and ongoing expectation or requirement that the employee returns day after day to continue to receive work and payment, the relationship is more akin to an employment. A self employed individual by contrast would finish a piece of work then likely have to quote for the next one if there is any further work available.
In deciding a person’s employment status it may sometimes be necessary to take into account factors which are personal to the worker and which have little to do with the terms of the particular engagement being considered. For example, if a skilled craftsman works for a number of engagers throughout the year and has a business-like approach to obtaining his engagements (perhaps involving expenditure on office accommodation, office equipment, etc) this will point towards self-employment. Personal factors will usually carry less weight in the case of an unskilled worker, where other factors such as the high level of control exercised by the engager is likely to be conclusive of employment.
It is the reality of the relationship that matters. It is not enough to call a person “self-employed” if all the terms and conditions of the engagement point towards employment. However, if other factors are equally balanced, the intention of the parties will then be the decisive factor in deciding employment status.
After considering these factors and any other factors you feel are relevant, if you feel that you are unable to make a decision, you can use the HMRC’s on line tool to determine the status but you are not bound to do so.
The tool can be found via this link.
If you undertaking an engagement and are deemed to be an employee for IR35, the earnings attributable to your work will be subject to PAYE as in any employment relationship. The national insurance element will be due from the you but employer NI also needs to be paid. This employer NI represents a cost to the engagement and an agreement to how this is accounted for should be reached and understood prior to the start of any engagement.
Significant changes to the IR35 rules were introduced from 6 April 2017. These rules do not impact whether or not the PAYE is due, but determines who should collect the PAYE and pay it to HMRC.
If your hirer is a public sector organisation (defined in this context by being subject to the freedom of information act), the party responsible for paying over the PAYE is the party who pays you or your limited company.
Therefore, if you are contracting directly with a public sector organisation, they will be the deemed employer for tax purposes. As such, they will need to pay the tax and NI under your own PAYE scheme. The cost of the employer NI will fall upon them.
If you are working for a public sector organisation via an agency, i.e., it is the agency pays you or your limited company, it will be the agency who becomes the employer for tax and NI purposes and is responsible for paying the PAYE to HMRC along with that of its own employees. In this case, the cost of the employer NI will fall upon the agency. In previous tax years, this cost would have been passed on to the limited company in order that they may pay it HMRC.
You should note that under the new rules, the public sector hirer is duty bound to provide a determination of employment status to the agency. It is them for the agency to decide if, given the information from the hirer and the nature of workers payment vehicle, if PAYE should be operated on the payment or not.
If you are working for a private sector hirer, (ie the hirer is not subject to the freedom of information act), it is your responsibility to account for the correct income tax and national insurance. If you are working via a personal service (Ltd) company, the same employer NI will be due on the fee paid by in this instance, it will be your responsibility to pay it to HMRC. You should therefore ensure that this amount is built into the fee you negotiate with your agency or direct client.
It should always be remembered that in every situation where an employment relationship is deemed to exist, the total costs attributed to the worker are almost identical however the contractual chain is organised. The only material difference is which entity collects and pays the liabilities to HMRC.
If the relationship is one of self-employment, ie is you are truly in business on your own account, there is no obligation on anyone to apply PAYE to the fee. The income can be paid to an individual or personal service company without a deduction of income tax or the payment of National Insurance.
You may not know this but there is a set of rules that recruitment businesses must abide by which relate specifically to their own conduct. It is important that you know this as you may be asked or advised to opt out of the protection of these rules. We wanted to draw your attention to why this is sometimes advised and why we think this is a bad idea.
Amongst other things, the rules ensure that agencies do not:
It is a misconception that to be inside the remit of the conduct regulations will bring you inside IR35 or that it is a strong contributing factor. The reason for this is that the conduct regulations also require a greater degree of information exchange and commitments between the agency and the client and a greater regulation of the contract. A general sense of closer connection may feel like you are walking towards an employment relationship.
The fact is though that these protections and oversight exist between the agency and the hirer. In the vast majority of cases an opt out would have no impact on the outcome of an employment relationship decision.
The following statement is from the REC (the governing body of the Recruitment Industry).
“LCCs [Limited company workers] typically choose to opt out because they wish to demonstrate that they are genuinely self-employed. An individual’s self-employment status is determined by whether they are inside or outside of the IR35 tax legislation, opting out of the Conduct Regulations will therefore have little impact on whether an individual is genuinely self-employed under IR35.”
It would not be wise therefore to discard important rights for the purposes of a tax position that you cannot write yourself. Your tax status is determined by what is actually happening at your hirers organisation and the nature of the relationship between you and them. It has little or no consideration for if you have taken it upon yourself to opt out of the agency conduct regulations.