Answers to your question from webinar host, Martin Jackson
For those of you who attended our recent tax webinar on IR35 ‘IR35: Changes for the Private Sector from April 2020’ with host Martin Jackson, we have the long-awaited answers to your questions right here, from the host himself.
And for those of you who missed the webinar, there’s still a chance to catch up, simply click the link here. You may also find the IR35 Q&A useful to your own tax work.
Take a look at Martin’s expert answers to your questions below…
1. What happens if the contractor works from overseas, has a letter from HMRC to say they no longer need to complete tax returns in the UK and pays taxes in their home country, but they carry out similar work to employees?
If the individual is not UK resident and does not perform any duties in the UK, then they would be outside the scope of UK employment tax, and IR35 would not be relevant. Their tax position would be governed by the domestic legislation of the country in which they are resident.
However, if the individual actually performs work in the UK, then IR35 would apply to payments made in respect of that work.
2. If the intermediate agency requires the PSC/worker to use an umbrella company which then pays the PSC/worker, what is the correct flow of funds from the PSC raising its invoice to the agency?
In the arrangement you describe, the worker/PSC is contracting with an umbrella company, which in turn contracts with an agency. So the flow of funds should reflect that chain: payment should be made from the agency to the umbrella company, then from the umbrella company to the PSC. The chain of invoicing should follow suit: the PSC invoices the umbrella, then the umbrella invoices the agency.
3. One of my clients says the agency is going to deduct employers NI Cs from his payment, so he will be paying both employee and employer NICs - surely that is wrong?
Yes that would certainly be wrong, and indeed unlawful, but I suspect that it may not be quite what is happening.
The problem is simple; the agency realizes that IR35 applies and that it must operate PAYE and NICS. Crucially, this means that it is liable for employer NICs of 13.8% - a significant additional expense which is cannot sustain. So it must either pass on the additional cost to its client (and risk losing the contract) or it must 'squeeze' the sub-contractors it pays - which is the most common choice.
However, legislation does not permit an employer to simply 'deduct' employer NICs from a worker, so the usual course of action is to reduce the worker's contractual rate. For example, if the daily rate had been £300, the agency may want to renegotiate a lower rate of, say, £263 per day to take account of its additional costs. This is not a 'deduction' - it is a 'reduction'. The difference being that a 'reduction' is taken from the gross figure before any tax and NICs are applied, whereas a 'deduction' is taken after tax and NICs. I suspect that is probably what is happening in this case.
4. If the original decision to apply IR35 is overturned, what happens to the PAYE and NICs which should not have been deducted?
If the client issues an initial Status Determination Statement which is later overturned under the client-led disagreement process, then the client can amend future RTI returns to correct the position and any PAYE & NICs which had been deducted in the interim may be refunded - as if IR35 had never applied.
5. What about reimbursement of in-contract travel/airfares and hotels etc? Are these now taxed at source by the fee payer or can they be reimbursed in full? It seems pointless incurring travel costs if these will be - which would not be as per a direct employee?
Legislation (section 339A, ITEPA 2003) was introduced from 6 April 2016 which affects workers providing services to clients through an ‘employment intermediary’ which could be:
- an agency
- a recruitment or employment business
- an umbrella company
- a managed service company (MSC)
- a personal service company (PSC) if IR35 applies
The effect of the legislation is to treat each engagement as if it were a separate employment. Travel to and from the assignment (including subsistence and accommodation) is then 'ordinary commuting' and so tax relief is not available. In other words, travel to and from the assignment is treated in the same way as normal home-to-work travel would be for a direct employee.
But this does not necessarily mean all travel will be denied relief. For example, if the client requires the worker to visit a customer, or attend a meeting somewhere other than the client’s normal workplace, then travel in these cases would be eligible for relief - just as it would be for a direct employee.
6. Would the fee payer need to pay any pension?
No. If IR35 applies then the arrangement is treated as if it had been employment for the purposes of tax and NICs only – but it is not actually employment. Therefore the protections afforded by the various aspects of employment law that would apply to direct employees, for example National Minimum Wage, Working Time Regulations and auto-enrolment for pensions, do not apply.