IR35: Don’t be put off by an Outside IR35 determination

With so many companies still unsure how to implement changes to their recruitment policy to accommodate the impending IR35 legislative update, I thought it might be useful to address one of the core issues that our clients are requesting clarification on.

Can a worker be paid on a PAYE basis when they are delivering an Outside IR35 assignment?

Everyone’s talking about Inside or Outside IR35 but few are distinguishing between the nature of the assignment and the pay mechanism’s that are available to both.

Notable companies including HSBC, GSK and many others have been quoted as saying that all their sub-contract and freelance workforce will have to accept Inside IR35 contracts or leave the business. I would be surprised if this was true for the small minority of workers that provide critical skills to the Executive boards of these companies.

Status Determination Statements (SDS)

The client must provide the intermediary, agency or worker with an SDS. The SDS is created by answering key questions regarding the nature of the role or assignment. The questions are packaged into a determination tool and there are already many tools readily available including the HMRC CEST tool.

It is worth noting that the questions can be broad in nature and open to interpretation, for example how do you define the phrase ‘management responsibilities’ as it’s different for each company. It is worth establishing how HMRC define ‘management responsibilities’.

The CEST tool will determine either;
Inside IR35: Off-payroll working rules (IR35) apply
Or
Outside IR35: Off-payroll working rules (IR35) do not apply

It is important to remember that the SDS only determines the nature of the assignment or job role and is different from the pay mechanism that the client decides to apply.

the SDS only determines the nature of the assignment or job role and is different from the pay mechanism

Pay mechanisms available

With Outside IR35 determinations, the client still retains the choice in how to pay the worker. This can be on a tax and national insurance deducted at source (PAYE) basis or on an invoice (business to business) basis.

Regardless of which pay mechanism is chosen by the client the worker can be paid directly or through an intermediary or agency (from now on called fee payer).

The advantage in using a fee payer is that they are liable for any unpaid tax and national insurance should the client SDS be deemed incorrect by HMRC. It’s worth noting that there is a transfer of liability to the client should the fee payer be unable to pay any fine or penalty that has arisen from an incorrect determination.

In short, the fee payer takes onboard the risk associated with an incorrect determination.

With Inside IR35 determinations, the client, intermediary or agency must deduct tax and national insurance from the worker at source – there is no other choice. In addition, the client will have to pay employers national insurance plus a margin to the agency or intermediary.

Outside determination and PAYE

Given the nature of traditional Interim Management assignments such as programmes of change, transformation and restructuring, it is likely that the SDS will legitimately be determined as Outside IR35.

It is also understandable if an organisation decides that they want a worker that is delivering an Outside IR35 assignment to have tax and national insurance deducted at source. This method ensures that the risk associated with an HMRC investigation due to incorrect determination is further minimised.

In this case an Outside IR35 determination and PAYE pay mechanism can be combined. This will ensure that you can access the best Outside IR35 specialists to deliver business critical programmes.

The good news

The vast majority of our Interim Managers and Independent Consultants are best suited to deliver an assignment that is determined Outside IR35. The nature of an Outside IR35 assignment requires workers who are very experienced and who can influence board level stakeholders.

Most of our candidates are also happy to adhere to the pay mechanism that has been decided by the client whether that be through their Ltd company (B2B) or with tax and national insurance deducted at source (PAYE).