This article was updated on 31 July 2020 to reflect confirmation that IR35 rule changes will take effect from April 2021.
It’s not just about tax
For the purposes of the off-payroll working rules, one of the key questions is whether the engaged individual would (for tax or NICs purposes) have been an employee of the client if they had been working directly for it rather than engaged through an intermediary.
This is often referred to as deemed employee status to distinguish it from actual employee status for employment legal rights purposes. The proposed changes to the IR35 rules for the private sector from 6 April 2021 require working status determinations to be made and communicated, with debt transfer risk where the determination is not done or the status determination communication chain is broken.
But the IR35 and the off-payroll working rules only determine an individual's working status for tax purposes. It is critical to remember that the question of whether an engaged individual is an employee or worker for legal rights purposes sits in parallel.
There are 3 working rights statuses for employment legal rights - employee, worker and the self-employed. Whilst there are statutory definitions of the first two of these statuses, those definitions are deliberately skeletal with judges assessing how the kaleidoscope of a dozen or so working factors coalesce in each case to form a picture matching one of the legal working rights statuses. Working arrangements differ so that working rights status prediction using decided cases is challenging, particularly because the labels used in written agreements supporting a working relationship can be overridden by judges where they do not reflect the legal reality.
This matters because employees benefit both from implied contractual legal rights and from far-reaching statutory employment rights. The implied contractual rights include implied contractual notice periods where there is no agreement to a length of notice. The statutory employment rights include the right not unfairly to be dismissed and the right to maintain employment contract terms on a business transfer.
“Worker” is a legal rights status category which only exists in terms of employment legal rights and is not engaged in the IR35 determination as to tax status. So, much of case law relating to employment legal status can not be directly related to tax or IR35. The legal rights of “workers” have grown over the past five years. These rights now include national minimum wage, equal pay, holiday pay, discrimination protection, whistleblowing detriment protection and from April 2020 added the right to be given on day 1 statements of the terms of their employment or engagement covering the same categories as those for employees. This status category of “worker” has been the fall back position of gig economy employers who fail to make good on assertions of self-employed status for their battalions of drivers, riders, delivery personnel and the like. However, worker status legal rights are fast catching up with the legal rights of employees and so it is no longer an employer’s cheap legal rights option including particularly the changes made in April 2020 requiring written statements of terms for workers.
For some banks and others, the challenges and risks of the IR35 changes in the private sector are seen as resolved by conferring not just deemed employee status for tax purposes on their engaged workforce but also legal working rights status as employees. For others there is an acceptance of deemed employee status for IR35 purposes but a silence about any legal rights status. The proposed changes do make it clear that an IR35 working status determination as a deemed employee will not automatically confer employee status for legal rights purposes.
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.
Determining an individual’s employment tax status
In the next article, Carolyn outlines the factors that determine an individual’s employment status for tax and how those sit in parallel with employment legal rights determinations.