There is a key category of engaged individual via a PSC where terminating the arrangement with the intermediary as a part of changes to IR35 workforce structuring is a particular risk. Directors of their own PSCs may not always be employees of that entity. Many end users will not actually know if this is the case, but there is some (probably low) risk that they are seen for legal rights purposes as employees of the end user or they may be workers for the end user.
If engaged individuals are offered direct employment, effectively collapsing the agreement with their corporate intermediary, what happens to the employment of any spouse also remunerated by the intermediary? If there is a TUPE transfer, is there a spouse who is an employee of the PSC and, if so, does the wife’s employment transfer too on the direct engagement of main individual in the PSC? An analysis of the activities of the wife or other participators who receive income from the PSC would be time well spent.
Alternatively, the director may seek to make a redundancy termination payment to himself and/or the spouse on that termination. Whilst the tax effectiveness of such a payment must be an issue for the PSC and not the end user client, the efficacy of any purported employment termination by the intermediary of the engaged individual will need to be scrutinised by a future directly-retaining end user so that continuous service rights are removed. Indemnities would generally be wise, but they may not work if put in a new employment contract. So, a contractual and statutory rights settlement agreement protecting the end user from claims may be a wise precaution. Care is also needed to ensure that the impact of another planned change (also effective from 6 April 2020) to the period of non-engagement required to break continuous employment from 1 week to 4 weeks is managed carefully rather than a seamless transition from indirect to direct engagement contracting being used.
Agency workers protections can also permeate PSC constructs and agency workers rights are also a growth area, again with increased rights from 6 April 2020.
Overall, whilst IR35 engages the deemed employee status, the legal rights categorisation is no respecter of any parties’ constructs pointing to the contrary but instead focuses on the reality and enforces the legal rights so conferred. A prime example is TUPE rights which apply by operation of law, irrespective of the parties’ contract to the contrary. It should also be borne in mind that employment legal rights are enforced by the engaged individual bringing a claim – usually when relationships have ended. So, an organisation with many engaged individuals could well find it is more likely to be impacted by an employment legal rights claim than by a review by HMRC of the tax status and a possible tax cost across several workers.
Designing the post new IR35 workforce solution should not be looked at in tax isolation in order that an end user properly manages their risks.
Instead the often-pervasive employment legal rights already in existence and likely to be created or transferred must be assessed and managed effectively to avoid future claims risk.
A joint cohesive workforce structuring solution to the IR35 tax changes sitting alongside a full employment legal rights understanding will be sought by the wise business leader.
What’s the employment legal rights status of any engaged individual working in your business via a PSC intermediary?
Is an engaged individual an employee of their PSC?
What’s the impact for employment legal rights purposes of deemed employee status determinations?
What employment legal rights risks are there by ending your agreement with a PSC?
Are you free to make a new direct agreement with an engaged individual or do they already have employment legal protections?
How can you manage any existing employment legal rights on an IR35 workforce restructuring?
Contact Carolyn Brown for more information on how you can prepare.