IR35 private sector reforms: Royal Mail contractors ‘frustrated’ by tax status test regime

Self-declaration

Presently, it is up to contractors to self-declare if the work they do and how it is performed means they should be taxed in the same way as off-payroll workers (outside IR35) or as permanent, salaried employees (inside IR35).

An inside IR35 designation, therefore, means the contractor in question is considered to be an employee of the company for tax purposes, so their gross pay will be subject to PAYE and National Insurance deductions.

As per HM Revenue & Customs' (HMRC) IR35 guidance, private sector organisations must use “reasonable care” when determining the tax status of the contractors they engage by individually assessing their working arrangements on a case-by-case basis.

The outcome of these assessments must be confirmed in writing to the contractor in the form of a Status Determination Statement (SDS), which must also outline the reasons why their engagement has been classified as either inside or outside of IR35.

Computer Weekly understands Royal Mail’s preparations for the onset of the reforms have left some contractors frustrated because the company is not issuing SDS documents to contractors whose roles have been deemed inside IR35 as a result of the “initial assessments” it has carried out.

Contractors further claim this had made it difficult for them to challenge and query the results of these “initial assessments” as a result.

Intermediary

In response to this, a Royal Mail spokesperson confirmed: “We will not be providing PAYE workers with a determination or with specific reasons, as we are only required to do this where we are engaging via an intermediary after 6 April 2021.

The spokesperson added: “For those engaged via an intermediary after [this date], we will issue a Status Determination Statement and offer an appeals process in accordance with our obligations.”

Computer Weekly shared details of Royal Mail’s IR35 preparations with HMRC, who said it cannot comment directly on the approach the company is taking. Even so, a spokesperson for the tax collection agency confirmed private sector firms are only required to provide contractors with an SDS once the reforms come into play at the start of next month.

“When the off-payroll working rules change on 6 April 2021 all relevant client organisations must have a process to allow workers operating through an intermediary, such as a personal service company, to disagree with their status determination. They must also share their Status Determination Statement (SDS) with these workers, along with their reasons for coming to that conclusion,” the spokesperson confirmed.

“Businesses may consider whether limited companies or other intermediaries are the best way to engage contractors if they are working like employees. This is a business decision for organisations to make, and organisations are free to decide how they engage their workers.

“Some organisations might decide to offer workers employment contracts or offer them roles through an agency rather than directly,” the spokesperson added.

Dave Chaplin, CEO of contractor tax compliance consultancy IR35 Shield, said the approach Royal Mail is taking in complying with the reforms is one many others also appear to be taking, based on its research.

In a recent poll of 3,000 contractors by IR35 Shield, 47% of participants said they did not receive an SDS after the end-client completed its assessment of their tax status.  

“That is a lot of contractors not being treated correctly under the new legislative requirements. While firms technically do not have to do anything until the legislation takes effect on 6 April, all that does is breed contempt from the contractors who are seeking certainty on their status, in addition to building up a cliff-face risk for the firm,” Chaplin told Computer Weekly.

“We are only weeks away, and there are more sensible routes that produce less risk for firms who wish to engage with the new legislative framework early.”

There is also mounting anecdotal evidence that contractors are voting with their feet when told their jobs are inside IR35 and they must move onto PAYE arrangement if they want to continue working for the firm in question, added Chaplin.

“Given the choice of moving onto payroll, many contractors are opting to ship out and seek alternative contracts where they are being treated fairly,” he said. 

“Contractors are losing out and so are firms who are getting this wrong, who will see projects delayed and disrupted as a result non-compliant and laissez-faire approaches to assessing or rather, not assessing, their contingent workforces.

“A firm that takes a strategic and proper approach to its compliance obligations should not fear the legislation and is unlikely to fall victim to any HMRC challenge that may come its way,” said Chaplin. “HMRC says it wants to help firms to implement the rules properly and this appears to be an instance where intervention is sorely needed.”