Claire Halle-Smith, senior associate at Wright Hassall, looks at the background to the new IR35 rules governing the use of contractors and explains how this can affect both transport companies who use self-employed drivers, and drivers who claim to be self-employed.
Transport companies, whether they HGV hauliers or PSV operators, have traditionally used the services of self-employed drivers – often as an additional pool of skilled resource to complement their permanent workforce.
If you are a self-employed driver, or a company with drivers on your books, you will know the IR35 rules changed from April 6, 2021 which will impact your contractual arrangements as to how you buy, or provide, your services.
How we arrived at this point
By providing their services to an organisation via an intermediary, usually a personal service company (PSC), drivers, and the companies using them, are able to enjoy significant tax advantages. However, HMRC’s belief that PSCs were specifically being used as tax-avoidance vehicles led to the implementation of the off-payroll working rules (otherwise known as IR35) in 2000, designed to address ‘disguised’ employees.
In 2017, the IR35 rules were amended. Public sector organisations were made responsible for determining the employment status of those they contracted via PSCs, and for paying the income tax and NIC for those deemed to have employee, rather than self-employed status.
From April 6, 2021, this requirement has been extended to large and medium-sized businesses in the private sector, and so affects transport companies and their drivers in the same way.
What now for employers?
Transport companies that receive services from self-employed drivers are known as ‘clients’ under the legislation. All client companies in the private sector will have to comply unless exempted by meeting at least two of the following criteria:
- An annual turnover of less than £10.2m
- Balance sheet total of less than £5.1m
- Fewer than 50 employees
Non-exempt companies must determine the nature of the employment relationship they have with their drivers. This has proved key in a number of recent challenges brought by HMRC, and the four main principles on which the relationship will typically be judged are:
- Control: What control do you have over the driver (eg, what, how, when and where they work)?
- Substitution: Can the driver substitute a suitably qualified person to act in their place?
- Financial risk: How much financial risk is borne by the driver?
- Mutuality of obligation: Are you obliged to give the driver work, and are they obliged to accept any work you give them? (The HMRC online test to check employment status, CEST, does not consider Mutuality of Obligation, assuming it exists in every driver engagement).
Having assessed the employment status of its drivers, the company must issue them a ‘Status Determination Statement’ (SDS) which confirms whether the driver is genuinely self-employed or now considered an employee, giving reasons for the determination.
HMRC will deem the client company liable for tax and NI contributions until the driver (and agency or other organisation that contracts with the client company) is told of the status determination and reasons for it.
When the driver is deemed to have employee status, subject to tax and NI contributions, both parties will need to consider how to deal with the additional tax cost.
Companies must ensure their systems are structured appropriately for IR35 and create a system for addressing any challenges raised by drivers in terms of the employment status determination, with legal advice a helpful step in getting things right.
Drawing the right conclusion
Transport companies that employ the services of drivers and those drivers currently providing those services, either directly or via a PSC, should review the terms of their engagement thoroughly.
Client companies are liable for tax and NI contributions until they tell the driver and the person the driver contracts with, of its determination and the reason for it.
HMRC has committed to a ‘light touch’ to non-compliance penalties for the first 12 months and is already providing a range of resources to assist organisations in their preparations. However, caution is recommended when relying on such statements from HMRC, as we have seen these can change without notice – and in any event, it will still seek to recover any unpaid tax resulting from non-compliance. No doubt it will also be learning from past experience to improve its future success rate in court.
Traffic commissioners have also noted HMRC guidance in relation to those holding operator licences, indicating non-compliance with the off-payroll rules could be an issue of Repute.
Do not be tempted to bypass IR35 by other means and treat any advice to implement a tax avoidance scheme with considerable caution, as most do not work and do not have HMRC’s blessing.