Office Angels: In Conversation With...

Office Angels: In Conversation With...IR35 Q&A with Gavin Tagg, Legal Counsel, Adecco Group UK&I

March 05, 2020 Office Angels Season 1 Episode 1
Office Angels: In Conversation With...
Office Angels: In Conversation With...IR35 Q&A with Gavin Tagg, Legal Counsel, Adecco Group UK&I
Office Angels: In Conversation With...
Office Angels: In Conversation With...IR35 Q&A with Gavin Tagg, Legal Counsel, Adecco Group UK&I
Mar 05, 2020 Season 1 Episode 1
Office Angels

The Government has announced that new changes to the IR35 legislation will come into effect on 6th April 2020. Kate Garbett, Head of Office Angels, is joined by Gavin Tagg, Legal Counsel for the Adecco Group UK&I, to discuss these changes, answer the most frequently asked questions, and how these changes may affect businesses in the future. 

This podcast was recorded on Tuesday 25th February 2020. 

Show Notes Transcript

The Government has announced that new changes to the IR35 legislation will come into effect on 6th April 2020. Kate Garbett, Head of Office Angels, is joined by Gavin Tagg, Legal Counsel for the Adecco Group UK&I, to discuss these changes, answer the most frequently asked questions, and how these changes may affect businesses in the future. 

This podcast was recorded on Tuesday 25th February 2020. 

Kate Garbett:   0:00
Hi, everyone. My name is Kate Garbett. I'm the Head of Office Angels in the UK, and I'm delighted to be joined today by Gavin Tagg, our Adecco Group Legal Counsel, who knows much more about IR35 you'll be pleased to know, than me. Gavin has been providing advice and guidance to many of our clients for a little while now on this subject, and because Office Angels employ our temps on a PAYE basis, it hasn't really affected us in a huge proportion of our clients. However, of course, many of our customers do employ contractors, and therefore we have been having lots of questions. So we put together today a short podcast with your most frequently asked questions, that I'm going to be putting to Gavin today, hopefully to give you a little bit more information so I hope it's helpful. Thanks for joining Gavin. So first of all, just really a brief overview for anyone who's listening, on really what IR35 is and why it's coming into effect, would be great.

Gavin Tagg:   0:54
Yeah, actually, IR35 is nothing new. It's  been around for 20 years. IR35 comes from Inland Revenue press release number 35 of 1999 and it came into force in the year 2000. So it's actually been 20 years. Basically, it's the short hand for the off payroll working rules. There's a lot of detail behind them. I'm just gonna try and summarise it for you. Basically, HMRC's position on this is that they believe that there are people who work through their own personal services companies, their own one man limited companies, but they're doing their work in very much like an employee would, and they believe that that is what they call disguised employment. When they passed the rules in 2000 it was to target what they call the Friday to Monday contractors. That would be people who are working as an employee on the Friday, would leave, and come back on the Monday through their own limited company, doing exactly the same sort of work, but paying less tax. So that is the population of people that HMRC targeted when they passed the IR35 rules in 2000. What's actually changed and this is why we're talking about this now, is that the decision as to whether or not someone is caught by IR35 or not has changed. It used to be the contractor that had the entire decision making power over that in conjunction with their accountant or whoever. But now that decision is firmly with the client and also the liability to pay the taxes, that has also changed. Again, that used to be the contractor and his limited company, but now that liability passes to the fee payer, the agency,

Kate Garbett:   2:24
Of course. So essentially, what they're trying to do is ensure that true contractors are taxed in a true contractor fashion rather than everybody getting a piece of that action?

Gavin Tagg:   2:33
Exactly. They're not saying that everyone is caught by IR35, and there are many contractors that do their jobs genuinely, as  freelancers, as in a self employed manner, and those people should carry on being taxed in the correct way. But for those people who are very employee-like in the way that they do their work, they should be taxed like employees, that's the theory behind it.

Kate Garbett:   2:52
We've had a few rumours, and this is a question that came in from some of our customers around the legislation possibly changing again, and I know we can't predict the future, but in your expert opinion, do you think there's likely to be any changes?

Gavin Tagg:   3:03
I can pretty much categorically rule out any changes now. We're so close to when it comes into force on the fifth of April. There were suspicions that the General Election may have changed things, and, of course, the budget was put forward as well, as a result of the General Election, and when the political parties were making their pitches for votes, they were suggesting that maybe they would review it and that it might change. So it was a vote winning strategy, but very quickly after the Conservatives won,  Sajid Javid, who was the Chancellor at the time, said, "right, we're having a review on it", but it wasn't whether or not they were going to ditch it, it was whether or not, well, it was basically how can we implement this as smoothly as possible? So absolutely this will be coming. 

Kate Garbett:   3:46
And will our customers need to sign new contracts with the agencies that they work with, post-IR35? And do they need to get in touch with them if they haven't already been in touch?Do you mean new new contracts with with other agencies?  

Gavin Tagg:   4:01
No. I don't think that they need to wholesale revisit their terms of business that they've got with their agencies. Very often there will be clauses within those terms of business, which are tax indemnities, which some clients, we are aware certainly in our brands, that place a lot of personal services companies. They are looking to implement new IR35 style indemnities. However, there are some responsibilities on the client, which are absolutely outside the scope of the agency's remit. So we'll come onto that very shortly. And so it would be foolish for an agency to indemnify bad faith acts by the client, but is not absolutely necessary for clients to suddenly go "right, IR35, the rules are changing in April, we now need brand new contracts."

Kate Garbett:   4:46
Of course. Okay, and obviously I appreciate it's going to be different for every contractor, but how will IR35, in the main, affect a contractor? And what should they be doing at this point?

Gavin Tagg:   4:56
Okay, so the the biggest affect, as I have said, is that for the last 20 years, the good old days of contracting was where the contractor would take a look at the way in which he did his work, on site at the client. I'm talking here about personal services company contractors, to be clear. They would look at the work that they did, they would look at their contracts, and the clauses in their contracts, and they would use that to make a judgement, very often advised by their accountants or their lawyers,  and say whether or not they were caught by the IR35 rules. And in a nutshell, that would be whether or not the way in which they do the work, the day to day work, and issues such as control, substitution, neutrality of obligations, basically all the employment tests that are out there to decide whether or not someone is an employee or not. If there are lots of employment tests which applied, so they were very heavily controlled, or they couldn't send a substitute, it would be likely that they will be caught by IR35. However, you'll find that a lot of personal services company contractors will always tick the outside of IR35 box. So that's what's changing now. It was in their hands before, but now it's out of their hands. It's the client that makes the decision. So that's the biggest effect on the current contractor base.

Kate Garbett:   6:05
Indeed, and I, again, I appreciate it's going to be unique for every company, but is there a financial impact that we're seeing to our clients on this?

Gavin Tagg:   6:13
I think, for large users of PSC contractors, I think inevitably there will be an adverse financial impact. It really does depend on how good you are as a client in managing your workforce and coming up with a complex and nuanced approach to dealing with IR35 going forward. If you were to  say to your contractors "right, I can't really be bothered to do too much work here,  I'm just going to say that you're caught by IR35", there will be an impact on clients in that a lot of the contractors who were there will say "well, I'm not working here anymore, I'm going to go and work for another client that takes a slightly better approach to it" because, like I say, there are a lot of contractors out there that genuinely do work in a freelance way. So if they're caught in a drift net simply because the clients don't want to take the effort to take an approach, which looks at all of them and considers their individual circumstances, there's gonna be a lot of talent lost there, so there is that impact.

Gavin Tagg:   7:06
Also, there'll be clients who simply cannot do without their flexibility of their workforce, and where they can't find a solution for IR35, either by putting through maybe a statement of work solution, or possibly changing the working practices, maybe allowing them to substitute themselves by ceding control. If they need that flexibility, then if they want those contractors to stay, they are probably going to have to raise their rates.

Kate Garbett:   7:27
And in terms of those people that are working through an umbrella company, is there a difference, in terms of what the companies who have those contractors through umbrella companies, should be doing?

Gavin Tagg:   7:39
Absolutely, yes. Umbrella companies are not caught by the IR35 legislation. IR35 legislation only applies to personal services companies contractors, and that's where the worker owns more than 5% of the shares of the limited company in question. Where you work through an umbrella company, they're like a professional employer. It's a fully PAYE compliant solution, or at least it should be, a fully PAYE compliant solution, and the worker of the umbrella company doesn't own any shares in the umbrella company. They are exempt from IR35. So, if a client was to just have umbrella company contractors, no PSC contractors, they don't need to take any action.

Kate Garbett:   8:14
Great. Okay, I think there's been some confusion around that, so that's really helpful to be clear on. And as a company, as an employer, what's my obligation to now prove that I've done my due diligence, and that I've checked that these people are are either in or out of scope?

Gavin Tagg:   8:30
OK, essentially, there are three things that every client must do. This is in respect to it's PSC contractor base. First of all, they've got to make a status determination statement, and that is basically saying, one way or the other, whether or not that contractor is inside or outside IR35. Two, they need to use reasonable care when making a status determination statement, and three, they need to communicate that SDS to both the agency and also to the worker himself. Provided that those three boxes are ticked, the client shouldn't have any issues. There is an exception to that under the rules, which means basically, the only exception to that is where there is a party in the supply chain that, for one reason or another, does it wrong, doesn't pay the taxes the way they should,  HMRC do have the ability to go up the supply chain as far as the client, if necessary. So a client, in addition to making sure that it takes those three boxes when it making it's SDS, should also make sure that it has a supply chain that has got parties in it, which are both compliant, they know the rules, but also that they've got deep enough pockets to pay for the taxes that are unpaid.

Kate Garbett:   9:31
Of course. Yeah, absolutely. And, obviously there, the tool you mentioned where they can make the determination, the CESS tool, just for a question we've had come in,  is it always black and white, is it always yes or no as to in scope or out of scope,  or are there any other options that can come up? 

Gavin Tagg:   9:48
Yes, the CESS tool is one way of doing the SDS, and in our view, it's one of the best ways of doing it, because it's the only tool that HMRC have said that they would stand behind, provided that the information entered into the CESS tool is correct and accurate. If it is correct and accurate, then HMRC will say, well, if the verdict is outside IR35, then that's got to be outside of IR35, they will stand by that. It also is online, it's relatively easy to use,  there are about 28 questions, and they're multiple choice. There are other tools on the market that are available, and some clients may want to use them, or some clients may have the in house expertise to be able to make the status determination statement based on their knowledge of employment law etc. But the CESS tool is a pretty good way of starting. There is a problem with it, and you have identified it there. There aren't two answers. There's inside, outside and literally we don't know, not enough information. You'll need to make your own judgement, which is a problem because people will want to use CESS tool to get a definitive yes/no answer.

Kate Garbett:   10:46
Of  course. And hopefully most of the time they will, but in that situation it is going to be obviously more difficult. Okay, and one of the questions we're getting asked a lot is, what are other companies doing? I guess there's a little bit of don't blink first approach, you know, who's gonna move first and what happens here. We've had some customers talk to us about, you know, where there's a skill shortage, do they actually try and absorb some of the additional tax themselves, or increase pay rates, as you mentioned earlier, to try and help that. We've got others saying, fundamentally, we will not be doing that, we can't do that. Just from what you're seeing, is there any sort of trends that you're seeing or is it very, very different?

Gavin Tagg:   11:22
Well, it really differs massively, according to risk appetite of the client, and also number of contractors used, and in addition to the number of contractors used, what jobs those contractors are in. So to take the most extreme example, we have some of our financial services clients who have taken a very risk averse approach to the whole thing. And they have said that they will not accept any limited company contractors at all, not even umbrella company contractors. They're actually saying, if you want to be a contractor of ours, you need to go through an agency's PAYE payroll. That's the most extreme example, and it's not necessarily the best example. That's simply because that those clients have got Heads of Tax who are taking a very cautious risk averse approach to it. I would say that the best approach would be to have a multi pronged approach to things. That would be where you don't make a blanket indecision, or you take a decision like the banks, like no PSC contractors or no umbrella company contractors. But instead, in order to keep your workforce, you go through a fair full process with them all. Now there might be, it depends on the size of the organisation, but there may be certain buckets of contractors where you know that the job that they're doing is so much like an employee, that they're always going to be caught by IR35, and you could call them one population where you don't need to do SDS's for all of them. But there are others where you'll have people who are sort of on the cusp, an amber population if you like, and those people will sometimes be working in a certain way, which means that they could be outside of IR35. So maybe you allow them to appeal and to change their working practices. At the very furthest end of the scale, you've got the red group of contractors. These are people who are so mission critical to the client, that they cannot afford to lose them, so they really need to find a solution, and certain solutions will be available for those senior people, such as statement of work.

Kate Garbett:   13:14
Yeah, okay, okay, and in terms of actually what we can do to help, so what we're tending to see is that bigger corporates perhaps, in the main, are sort of ahead of this, have got a plan. We're seeing, certainly in Office Angels, a lot of our clients are in the more small to medium space. They perhaps hadn't really got involved in this yet. As the Adecco Group, we're very lucky we're part of a big group, we've, of course, got parts of our business that have been involved in this for much longer as part of the public sector, which came in much earlier. Obviously, we've got a lot of advice. people like yourself who we can come to. So what can we offer to our clients as a service from a consultation perspective if they are struggling, and after listening to this, they would like some further advice?

Gavin Tagg:   13:54
Well, I think that we would always, as part of our job is, as a responsible agency is to give our clients the advice that they need, to navigate their way through this, because you're absolutely right. Larger clients have known about this for a long time, and they've got the resources, the in-house resources, to put together a plan, and a lot of our larger clients have been putting this plan in place for quite some time, and it's been a case for the smaller, maybe the SME's out there, they've actually been  waiting for the legislation to actually drop, and it hasn't actually finally dropped yet, even now. We know that it's coming, but we still don't know the final version of it, and that's understandable, but that does leave very little time to get ready. However, one thing that is in their favour is that they don't have massive populations of contractors. They might only have 10. They might have 50. It's not as big an issue to grapple with. So what we should be doing as agencies and what we are doing is, we are giving the advice, these sort of things, like these webinars, these podcasts. Fact sheets, frequently answered questions, to the clients to educate them about the law, and what they need to do. Those three minimum standards that the client needs to do, because if the client doesn't do that, they will find themselves with a liability for the tax, provided that they, just to reiterate it, they do the SDS, they use reasonable care in so doing and communicate it to the agency and the worker, that should be all that they need to do. So it's really getting that information across, telling them right now, map your workforce, know exactly where your contractors are, find those contractors that might be dressed up as consultancy, but they are in fact, PSC contractors, and make sure that you got a plan for each of them, and have a multi pronged approach to them all.

Kate Garbett:   15:29
Of course. And so just to reiterate as well, if you're, you know, customer listening out there, if you already work with the Adecco Group, then, as Gavin says, you know, listen to the podcast, go on to our website, the Adecco Group UK&I website has lots of information on. But if you are really struggling and you don't genuinely know where your contractors are, we have some clients you know, perhaps have very disparate systems. We do have a particular service where we can come in and consult and do that with you, but it's obviously a different solution. But as Gavin says, most of this we can do through the consultation that we do a standard. But if you need a little bit more than obviously pleased do speak to us. We'd be more than happy to have a conversation and see if we can do anything to help. It won't be myself as it's not my area of expertise, but there's absolutely some brilliant people in the business who will be able to assist you with that. So I know Gavin, just finally, there's been a few conversations around the date and what that's going to be. Can you just explain to us any changes that have been around the date in the last few weeks?

Gavin Tagg:   16:23
The date is the same. The effective date of the legislation is the sixth of April exactly exactly as it was. The change that's happened recently, came about as a result of some consultations, which happened. This was the review that Sajid Javid, the Chancellor, put in place and we went to see the HMRC and they said, what can you tell us? Where are we going wrong? Is there anything we can do to implement this smoothly? And we said, can you please apply this legislation to all, for not payments made after the sixth of April, but for all services worked after the sixth, and they said that makes a lot of sense because the issue was,  and we found this out in 2017 with public sector when it came in place for the public sector. You could put in a bill for March, but if you put it in late and you put it in and it came in after the sixth of April, then unfortunately you'll be taxed under the new rules, even though you worked in the previous time. So that has changed. It does give us about another two weeks or so, and it means that we can make the cut off date much closer.

Kate Garbett:   17:26
Yeah, absolutely,  and great that we're able to be in a position to be able to lobby on that and that they listened! So that was, you know, obviously encouraging as you, as you said. Is there anything else that you think would be relevant for our listeners that I haven't asked you? I've gone through the most frequently asked questions, we've had, but anything else you think we need to add?

Gavin Tagg:   17:42
My final message would be, and this is a message that I've been giving in all the webinars and all the seminars that I've given over the years, that if you haven't acted on this, don't wait for the for the legislation to come out. Now is the time to really act on this. It really is a case of: gathering the data, finding out where your PSC contractors are, and then once you know where they are, formulating a plan which is sensible, and that will depend from client to client. But the first thing you need to do is actually gather that information, and then put in place a plan to deal with it, because if you don't, if you do nothing, then you will find yourself with the liability for paying that contractor's taxes.

Kate Garbett:   18:20
Yeah, absolutely. Get ahead of it where possible, and there's still time, so absolutely still time to get that sorted. Thank you so much for your time today, Gavin. You are absolutely the expert in this field, so it's great to have you on today, and I really appreciate your time, so thank you.

Gavin Tagg:   0:00
 My pleasure.