What US Executives Must Know About IR35's Impact in the UK for Independent Contractors
December 1, 2018 | 2:00 PM - 3:00 PM EST
Emily Stringer, Consultant Services Advisor, MBO Partners
Gene Zaino, Founder, MBO Partners
John Piazza, Senior Vice President, Client Solutions, MBO Partners
David Cassar, Chief Operations Officer, MBO Partners
Fergal Lennon, Managing Director, MBO Partners UK
Kevin Barrow, Partner, Osborne Clarke
01:30 Introduction of the webinar and the speakers
10:18 New tax developments affecting users of contingent workers
14:00 Historic risk profile for end-users in the United Kingdom
14:41 The position of tax developments in the United Kingdom: Historically, currently, and in the future
18:34 How will the new IR35 work in the United Kingdom
22:18 Market response to new IR35 measures
27:30 Growing concerns about issues caused by the risk of having contingent workers
32:34 5 tangible ways to prepare for the new IR35
55:32 Overview: Critical success factors
57:42 Closing Remarks
There is a growing concern regarding taxes and contingent workers worldwide. Most government revenues in the United Kingdom (UK) are still mainly derived from workplace taxes, which is a form of income tax along with a form of social security deduction.
It has been identified in the UK that if people work on a non-standard employment basis, it usually means they fall outside the normal deduction regimes for workplace tax. With the United Kingdom chancellor’s announcement of IR35 in April 2020 for the private sector, it moves liability away from the independent contracts to end-users and intermediaries.
In this exclusive webinar, Gene Zaino, Founder of MBO Partners, John Piazza, Senior Vice President of Client Solutions at MBO Partners, David Cassar, Chief Operations Officer at MBO Partners, Fergal Lennon, Managing Director at MBO Partners UK, and Kevin Barrow, Partner at Osborne Clarke and leading legal expert on the staffing sector, discussed what businesses need to do to prepare for the UK’s changes on off-payroll working in the private sector.
This Q&A-style discussion covered:
- If the announcement of the new IR35 regime was coordinated with Brexit
- How the new IR35 removes the liability from individual contracts to make sure contingent workers are paying taxes correctly, just like in the United States
- The qualifications for the new IR35
- How individuals can prepare for the new IR35
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[00:00:03] Emily Stringer Good afternoon, everyone, and welcome to today's interactive webinar, IR35 and the Private Sector: How to Prepare and Protect your Business. We have several participants who are still getting logged on. So we'll give everyone a few minutes to settle in and we'll start the webinar promptly at 1:02. Hello again, everyone, and welcome to today's interactive webinar, IR35 and the Private Sector: How to Prepare and Protect your Business. We're happy you can join us. My name is Emily Stringer and I will be moderating the webinar today. A little background on me. I've been with me over eight and a half years and work here as a consultant services adviser. Now for some housekeeping on the webinar setup, first and foremost, you can see the controls listed here. Secondly, we will be emailing a slide deck and a recorded copy of the entire webinar to all registrants within the next week. Last, we encourage you to ask questions throughout the presentation to chime into our conversation. At this time, we will take all participants off mute. We are also happy to raise a question on your behalf, so feel free to use the questions field. At this time is my pleasure to introduce you to MBO's participants who will lead us through an interactive open discussion on the topic of preparation for IR35. On the line, we have Gene Zaino, Chief Executive Officer of MBO Partners; John Piazza, our senior vice president of Client Solutions; Dave Cassar, chief operating officer of MBO Partners; Fergal Lennon, managing director of MBO Partners U.K.; and Kevin Barrow, partner at Osborne Clark. Gene, at this time, I'll turn it over to you.
[00:03:08] Gene Zaino Thank you, Emily, and thank you for everybody for joining. This is an open conversation. We have about fifty seven minutes left and it's on a pretty important topic for for those of you on the call, you obviously have an interest in what is going on with the regulation and legislation in the U.K. of IR35, which hopefully over the next better part of the hour we're going to help you get a better picture of that. We've got experts on the phone and just does a very high level background, just like here in the United States. There's an ongoing issue as to what is an independent contractor versus what is an employee. As you know, MBO Partners has been working on that problem here in the States and even in other parts of the world. But this is our business and we've been doing this for close to two decades. And the problems are very, very similar in other parts of the world. And today, specifically with the U.K., there's a change in the law coming in the next year or so by April 2020, which the risk of misclassification of a worker who would be otherwise paid as a independent contractor, but kind of, according to law, disguised as an independent contractor that really should be an employee. The risk of that misclassification is now going to be transferred from the worker to the company or the person, organization that's receiving those services. And the risks are pretty severe. So this is kind of a discussion for you to get a better understanding as to what is going on and what you have on the phone with me today is John Piazza, who runs a large part of our business and many of the enterprise clients. So, John, say hello and give a little introduction, please.
[00:05:17] John Piazza Thanks, Gene. As Gene mentioned, I run a number of the enterprise accounts here at MBO. I've actually had the pleasure of working with several of our clients who have expanded their use of MBO into the U.K. market. So this is an interesting time for us with IR35, because the interest is really started to increase significantly. So we're looking forward to the the months ahead and helping our clients succeed in this endeavor and mitigate the risk. So with that, I'll hand it back to you.
[00:05:50] Gene Zaino Thanks. Thanks, John. And Dave, Dave is our, here in the States and pretty much quickly becoming an expert around the world is in addition to many of his other duties. He's kind of in charge of all of our compliance policies and processes. So I'm going to have Dave pretty much take it from here and and manage the rest of this call. So, Dave, I'll let you introduce yourself and and get us get us going.
[00:06:17] David Cassar Well, thanks, Gene. Thanks for the flattering introduction. And hopefully I can live up to that. And welcome, everyone. We have two esteemed speakers today that will facilitate this discussion. The first is Fergal Lennon, as Emily mentioned, is the managing director of our MBO's U.K.. And Fergal has been in the contingent workforce business for 15 plus years with a special emphasis on independent contractors and their engagement in the U.K. personal services company, PSCs. And not only that, Fergal has been supporting our clients, some of whom are on the phone today with their expansion needs through the MBO program into the U.K.. So Fergal's very familiar with the US regulations as well as the U.K. regulations, and I think he'll be able to tie those all together for us on the call. We also have Kevin Barrow, who is our partner in international law firm, Osborne Clarke, and he is our counsel for our international endeavors here and MBO. Kevin's extremely experienced and the contingent workforce feels he has advised on upwards of 50 MSP and RPO agreements, and he has supported staffing in MSP programs from a legal perspective in forty five different countries since 2012. So he's been very busy. Kevin is familiar with the--has done Osborne Clarke research in Germany, the Netherlands, France, Spain, etc. so you're really getting the inside on IR35 from the experts. And so I'd like to turn it over now to Kevin to give you kind of an overview. Now, if you want to jump in before Kevin one moment, if you want to jump in at any time for all those in attendance, you can unmute yourself and just ask your question or if you'd rather you can type in the question fields and the application so we can see your question. If we're going to address it later on, we'll bring it up at that time or we might pipe in and interrupt at that point.
[00:08:38] Gene Zaino So just just before we start with Kevin, I'd like to have, you know, Fergal, who is the leader of our U.K. business, give a little bit of perspective and also talk about the webinar we're actually hosting tomorrow.
[00:08:57] Fergal Lennon Thank you, Jean and Dave, where there's a lot happening and a lot of attention with IR35 now in the U.K.. And we, as it happens, have been running programs that are compliant with IR35 for the last couple of years in the U.K.. And as Gene said, there's 20 years of experience by MBO partners in the US as well in running programs. So because the U.K. now is moving and catching up, the laws are aligning more closely with how they have been in the US. So we have, as Gene mentioned, a webinar tomorrow for the U.K. clients and prospective clients and the U.K., the sector in the U.K., and that's on tomorrow. And I would encourage people here today. Your counterparts in the U.K. can go to our website and sign up for this webinar tomorrow, which is very much geared for the for the U.K. market. Then I'll hand it back to you, David.
[00:10:10] David Cassar Okay, thank you, Fergal. Um, Kevin.
[00:10:14] Kevin Barrow Well, thank you. Thanks, everyone. So I've been asked to give you a little bit of an overview in the States about what's going on in the U.K. as Gene and others have said, things are moving forward here quite rapidly. There's a massive amounts of focus worldwide on the increasing use of contingent workers in Europe. You know, there's been a perception that voter anger is at least partly caused by the increasing casualization of jobs and precariousness of incomes. And to a certain extent, you know, the finger has been pointed at the role of staffing companies and intermediaries in relation to the supply of contingent workers. That's fair or unfair, depending on your point of view, but it is seems to be what's happening. There's lots of stuff in the media about cases, just as there is in America. You know, we follow those as well. There's lots of possible government responses, you know, new employment rights, new initiatives to reskill people. So they're not redundant, stuff like that. I think the main thing I would say about all this is that there's an increasing view that where contingent workers are used, then their employment rights should increasingly be against end users in a supply chain. So in the U.K. and other jurisdictions, the norm has historically been that if they've got a claim, they bring it against the person with whom they have a contract, which will be some sort of intermediary or platform that is changing.
[00:12:02] Kevin Barrow Now, no doubt, you know, you'll all be pointing out that this is stupid European stuff because there is an inexorable growth in the use of flexible workforce solutions. It's what workers want and it's
[00:12:15] Kevin Barrow what uses is what big [2.3s] businesses want. Yeah, I agree. But that doesn't mean we haven't got legislation on its way that relates to employment laws. What about tax? Well, alongside all of this, there are worldwide concerns about tax and contingent workers. Most government revenues in most countries is still mainly derived from workplace taxes in the U.K., we call that PAYE, which is a form of income tax and NICs, which is a form of Social Security deduction. It's been identified in the U.K. and in other countries that if people work on the nonstandard employment basis, i.e. as contingent workers, then usually that means they fall outside the normal deduction regimes for workplace tax, which means that treasuries are losing money and they don't like it. And so, in the U.K., that's led to a budget announcements. So in November 2018, which is being flagged for some time about extending and improving what's called the IR35 regime, which is broadly similar to your 1099 regime. But it involves, you know, quite big tax penalties and liabilities for people in the supply chain. I suppose before we go into how that should change, I think we need to how IR35's going to change. We need to look at what the current position in the U.K. as well. Historic risk profile for end users, that means your operations in the U.K. is that if they use independent contractors in the U.K., there's very, very little risk for them of work under worker misclassification type principles. There are a few things I've written down there, we don't need to go into them. There are a few technical liabilities that users might have, but generally speaking, the U.K. low risk and your procurement teams in your local operations in the U.K. haven't had to worry about this. Your legal teams haven't had to worry about this. That has begun to change already. Even before IR35 came in. The U.K. government is officially fed up with the apparent loss of tax revenues. HMRC has issued guidance to users, which is just guidance, just a recommendation. But it says you cannot anymore turn a blind eye to whether or not independent contractors in your supply chain are paying the right amount of tax. And if you're very, very short of things to do this weekend, you can look at that website which you've got pasted down below. Um, so what else is happening in the U.K.? Well, in addition, I'm actually of more worrying already even before IR 35 comes into play, there's a new measure. September 2017 came into force introducing a new offense which affects all major corporates if they fail to prevent tax evasion in their supply chain. So that's anything that involves a knowing concealment or fraudulent nonpayment of tax. And you don't need to be party to the fraud. You don't need to be aware of it. You're just liable criminally if you fail to prevent tax evasion. And your only defense is if you have reasonable steps in place to prevent that tax evasion by people you do business with. And that includes anyone beneath you in the supply chain, major subcontractors, MSPs. If you're if you're paying people in funny countries overseas, payroll partners, those payroll partners. And, you know, that is begun to focus people's attention, as I say, even before IR35 comes into force. And there's another piece of legislation that says if you try to help market tax avoidance schemes to your contingent workers as an end user, you may be liable. That's not a criminal penalty, that's just a civil penalty, and it but it does relate to tax avoidance. So not just where there's a criminal fraudulent evasion of tax using concealment. It's just where you you've tried to push your luck and stretch the limits of some sort of tax regime, then you might be liable. Now, you don't need to know the detail of it. All you need to know is that there is increasing focus on tax in the supply chain. So how will IR35 work? Well, the U.K. identifies a 1.3 Billion pounds per annum tax loss by 2022 due to IR35 abuse. It's estimated by the government that only 10% of independent contractors in the U.K. who should be paying sort of employment related taxes are. But because there is no liability higher up the supply chain, HMRC, the U.K.'s version of the Internal Revenue Service, haven't got the manpower to chase each and every independent contractor. So they've decided to have a go at someone higher up the chain. And guess who that is? It's going to be the end-users, that means your U.K. operations. 2018 is when the budget last month announced this. And, you know, it's there's no serious political opposition from any party, although we've got severe political instability in the U.K. right at the moment. Anyone who follows the news, this does seem to be something that's just going to happen. So how will it work? How will this new regime work? Well, there is already a new IR35 regime in relation to supplies of independent contractors into the public sector. And this regime's likely to mimic that regime. What it will do is impose on each and every end user who uses what's called in the U.K., a personal service company contractor, PSC contractor, which is by far and away the main way that independent contractors operate. An obligation on the end user to assess whether they're inside or outside IR35 or inside or outside 10--
[00:19:21] David Cassar Hello, Kevin?
[00:19:26] Gene Zaino Kevin?
[00:19:28] David Cassar That's interesting.
[00:19:32] Gene Zaino Alright, well, until we get Kevin, Fergal, do you want to kind of pick up on where we are?
[00:19:40] Fergal Lennon Yeah, I'll continue on, Gene, but I'm a--. We're talking about how the IR35 is going to work in the U.K. and it's likely to mimic, the private sector is likely to mimic what has already been happening since 2017 in the public sector. And the end user, which is the public sector end user, has an obligation to assess the status of the of the personal service company contractor. What that means is that's the classification they will be required to carry out a classification for all of their personal service company contractors--
[00:20:31] Kevin Barrow Hi, can anyone hear me now? Can you hear me?
[00:20:32] Fergal Lennon Yes, we can hear you now, Kevin.
[00:20:32] Kevin Barrow You know, we can't hear you now. I don't know what happened there. I beg your pardon. Well said, Fergal. So perhaps because it's important I'll pick up again what you just said. The changes will be liable if the worker is deemed inside IR35, but nevertheless paid
[00:20:48] Kevin Barrow more or so. [0.0s] There's a failure to
[00:20:49] Kevin Barrow deduct PAYE, then NICs, [1.7s] and it's not just if that happens, they're liable if the work has been paid gross, but shouldn't have been. And they failed to communicate their assessment, right? So they're not just liable if the person is paid gross when they shouldn't have been. They've got to have been paid gross when they shouldn't be. And the end user has fallen down on a couple of things. One is the failing to communicate their assessment to the staffing company. One is actually assessing the workers actually outside IR35 when they shouldn't have. Another is if they're asked by the staffing company why the assessments has been inside IR35, then failing to give their reasons. And the last is if the end user directly engages contractors. Now, what that broadly means is the end users got a lot more risk than ever before it has in the U.K.. You know, quite often for technical reasons within the legislation, it will also be the liability of an intermediary and if you actually engage people via an intermediary, you can usually structure it as an end user so that the liability will pass to the intermediary. And I think that's where MBO plans to sit in the chain when it helps clients mitigate the risks under this legislation. So how have people responded in the U.K. cause there has been this regime in the public sector. What clues does that give us about how the U.K. is going to develop? Well, of course, what happened initially was the end users initially just decided, well, in order to avoid any risk that we suffer liability for income tax and Social Security, why don't we just assess everyone as inside IR35 and force our intermediaries to pay them after deduction of tax? That was done. And in some cases, the contractors affected just put up with it and they accepted that they had it too good for too long and that was that. But what does seem to have happened in the public sector and we think will happen in the private sector, is that the good quality independent contractors will just leave and go to another end user who does actually decides to assess them outside. So it's not quite as simple as going for a safety first option where there are a lot of challenges from staffing companies about contractors. Well, actually, not about the status of contractors. Not actually, not so far. There might be when this regime moves to the private sector, but there hasn't been much challenging. Instead, just the contractors have walked. The new legislation may increase when it comes into force in 2020 for the private sector. May increase the obligation of end users to carry out, to exercise care when making their decisions. Another major developments in the U.K., well, the independent contractors who'd lost their
[00:23:56]Kevin Barrow nice eye on [0.0s] IR35 status and been paid without any deduction to PAYE and NICs, which, you know, general anecdotal evidence suggests, gave them about a 20% rate of headline rate of tax and national insurance, compared with 50% for employees, so it's a massive increase, the massive decrease in their Take-Home Pay, and they didn't put up with it. So they were seduced into the most aggressive tax avoidance schemes, lots of offshore schemes, lots of totally implausible schemes, lots of, frankly, fraudulent schemes. It's been an absolute bonanza for operators of tax evasion and tax avoidance schemes. And another thing that we've seen is contractors who had been treated as inside, sorry, had been treating themselves as outside IR35 up to April 20, up to April 2017. In the public sector, when the public sector regime came into force, they started bringing claims when their status changed. So what else is happening in the market? Well, what we're seeing is lots of people looking at new contracting models. And as we can see with, well, MBO is proposing some people, but no one with the track record with MBO are starting to look in the U.K. coming in to major end users and saying, appoint us as your subcontractor and we will engage all of your independent contractors. We'll take all risk under this IR35 measure and we'll carry out an assessment as to whether or not they should be inside or outside IR35, removing from you any obligation to carry that out assessment or any liability associated with an incorrect assessment. We're also seeing a growth in genuine statement of work services in the U.K.. Lots of independent contractors who have hitherto have just been paid gross, but actually paid at the time of material basis and effectively as part of the workforce of the end user, have been moving away to a more defined deliverable output based sort of basis of supply. We're also seeing big consultancies, the big four consultancies, PDC, etc., suddenly realizing that their supplies to major banks and all the rest of it
[00:26:35] Kevin Barrow are going to be caught by this. [1.2s] They use independent contractors in the U.K. massively, and they're effectively just acting as staffing companies. They're caught by this as well, and their whole economic model will have to change. What we'll see at the end of all this? Yeah, we'll see lots of personal service companies continue to operate, perhaps not so much, however, for lower skilled workers. We'll see them being employed by staffing companies or we'll see them directly engaged by the end users with staffing companies operating on a sort of margin only basis, which saves U.K. sales tax. Or we'll just see them moving over to, again, a form what we call PAYE, which is an employed model. So, you know, that's really wraps it up for me. You know, they're--
[00:27:31] Gene Zaino [00:27:31]Kevin, this to Gene. Just be clear on there, was recent announcements that really triggered us to have this--[7.6s]
[00:27:40] Kevin Barrow So that was the budget in last a month ago in the U.K.. The U.K. chancellor announced that he would definitely be introducing IR35 in April 2020 for the private sector, the new IR35 regime. That's the one that moves liability away from the independent contractor to end users and intermediaries. So that's the key takeaway, Gene.
[00:28:07] Gene Zaino Thanks.
[00:28:10] David Cassar Thank you, Kevin.
[00:28:10] Gene Zaino Thank you, Kevin. Great job and a--.
[00:28:16] David Cassar Just a moment to pause here for a second and see [0.7s] what kind of questions, if anything, and how people feel this might relate to their business needs in the U.K.. And to make sure that there's a clear understanding between how this aligns with what happens here in the US, obviously IR35 is a tax ruling that determines if someone can be paid as what we would call a payroll person here in the States or a temp worker versus an independent contractor. Obviously different terms that Kevin used. And what's interesting about what they did in the U.K. is they offer this out to the government, which is the public sector. First, to see how it would work and what kind of feedback they would get. And now, by 2019 April, it all commercial business will have to abide by these same rules. And I think the biggest takeaway from Kevin is that the liability is no longer on the individual contractor to make sure they're paying their taxes correctly. But just like here in the United States, it is becoming part of the responsibility, if not all the responsibility, of the end user, which would be the clients, the people on this phone call to make sure that they either have a process in place to qualify and pay the people properly or if they're using an intermediary, that they have the right contractual terms and ensure that their mediary is qualified to make sure that those people are paid compliantly. All that being said, I just want to make sure we're all aligned and that's why we're talking about this, because if you have contingent workers in the U.K., you want to make sure that if they're within IR35, they're payrolled. If they're outside IR35, then you have the proper qualification process to make sure that you've papered your file and you can pay them accordingly.
[00:30:13] John Piazza And just add to that, Kevin, one point I wanted to raise is that this announcement by the chancellor in November was not a surprise. This had been well flagged under the landscape. The legal landscape had been moving in that direction for some time. That would be fair to say, I think, Kevin.
[00:30:30] Kevin Barrow Yeah, well, I mean, if I remember Gene, we had a cup of coffee together, didn't we? About 3 years ago?
[00:30:41] Gene Zaino Yes, sir.
[00:30:42] Kevin Barrow I said it was coming, it was coming. And I think that's what got you thinking about moving your model to the U.K. So, yeah, it's definitely going to happen. And let's face it, the United States is not an unsuccessful economy. So one of the things historically which has presented the U.K. government looking at this is
[00:31:05 Kevin Barrow ]thrice [0.0s] from business to say, oh, well, if you introduce measures like this, it will it be bad for business. Well, the US has rules like this and the US seems to be doing alright. So, you know, that's one of the many reasons why I think this is coming. It's inevitable.
[00:31:28] Gene Zaino Is it a coincidence that it's coordinated closely with Brexit?
[00:31:33] Kevin Barrow No. If anything, that's led to it being postponed. It would otherwise, I think, have likely been 2019, it came into force.
[00:31:44] Gene Zaino Okay.
[00:31:46] David Cassar So the the need for talent isn't changing, and so it's important that end users, clients who want to be competitive in the industries they serve, have access to the best talent. And some of that talent, as we very well know, is independent. They're independent contractors are operating as PSCs in the U.K.. So Fergal is going to talk to us now about ways that you on the phone might be able to create a program to ensure that as you leverage contingent workers in the U.K., that you're doing it in alignment with IR35 and you can still take advantage of the talent that they possess. Fergal.
[00:32:32] Fergal Lennon Thank you, Dave. As Kevin indicated, the I suppose the landscape for the independent work force is going to change dramatically now from this announcement and it will change in April 2020. That is the date that has been flagged for the change. The only, I suppose, good news for businesses with this announcement is that it was thought it might be brought in in April 2019. So there's an extra year, and really businesses do need that extra year to prepare and get ready. There is a lot of-- it is a big job involved in doing that. I think that was the the good news that came out of us. What I'm going to go through are 5 tangible ways to prepare for IR35. And really the 5 tangible ways that are listed here, and I'll go through each of them briefly and really this is a high level touch on it. We're actually preparing a white paper which goes into this in a lot more detail on that will be available in the next day, in the next week or two. And that will go into a much more granular detail. But for now, I'll just deal with a high level and one is from a project team then that moves on to conduct an internal audit. And please create guidelines for independent contractors to make sure that independent contractors are properly classified and have a written contract for all independent contractors. So if we move on, Emily please.
[00:34:17] Fergal Lennon So the first thing to do is form a project team, and that project team is a cross-functional team that will have all of the key stakeholders, HR, legal, procurement, finance, but really, I suppose what I want to do is draw attention to 2 of the members of this team that are critical and key to making it a success. First off, it's vital to have someone as the project lead who will drive this project forward and have the gravitas within the business to do that. So that is a key position for the project lead contingent, workforce program manager, whatever you name it, how you name it in your company. The other really important role there is the internal senior level sponsorship. This has to be coming from the top down. You will have heard from what Kevin said. What are the risks now that are going to be? They are for the business. There's a considerable risk that that this change is going to bring to the business. That's going to require mandating certain changes through the business and senior level sponsorship coming from the top is essential from the start to make this a success. And if we move on to the next slide.
[00:35:54] Fergal Lennon Conducting an internal audit, that can seem like very daunting to start to think where do we start from in relation to this? But really, is this going to determine, how you do this is going to determine actually the scale of the challenge within your organization. The, I suppose, the idea here is to ensure that you have a visibility of all of the independent workers in your organization. And today there was less of a need, perhaps, to have that. But from April 2020, it is going to be essential that you identify every independent worker in the business and everyone that comes into the business also, from then on. All organizations have hidden, shall we say, hidden independent workers that come through, perhaps through management consultancy arrangements that are not statements of work that are more time based. The big 4 consultancies would have, would be doing that in a lot of companies. They would have people in on time based on a contract during contractual arrangements. And a lot of these independent contractors are clearly visible to the business. So it's very important that these are seen and are caught in this orders that will allow, I suppose, all of the risks to be looked at and to be tackled and dealt with. Segmenting is also of the independent contractors is very important. Who are the business critical contractors and ensuring that that you look at those. What ones are likely to be inside IR35, what ones are likely to be outside IR35 and then the in between the gray areas also. And for ones that are likely to fall inside IR35, is their business critical? You've got to look at things like the additional employment costs turning around to a contractor who's business critical to you and letting him know his Take-Home Pay is going to decrease by a considerable amount because he is deemed to be inside IR35. You've got to be able to manage those conversations and also have parameters in how the business is actually going to deal with them going forward. Next slide, please.
[00:38:47] Fergal Lennon Very much at the heart of creating the guidelines is having a level of enterprise wide consistency. It's important that the hirers and all of the different parts of the business that they actually understand that this approach, this new approach will be mandated, it works across the board in the business, that there isn't loopholes ways out or things like that because in the end of the day, the hirer wants to get the person actually into the role, they want to get them started in the job. So anything that can potentially either delay that or procedures or processes that they have to go through that they might not have had to go through before, that's a big change for them. And so the change management involved here and the educating and the communication to all of the stakeholders and the hiring managers within the business is essential. And you can't start that early enough, you know, to make sure that you can make this a success. So it has to come from the very start and has to be continuous all the way through also. Also, you need to consider the contractors, the independent contractors, independent workers and the employees, are they treated the same? What are the behaviors? You certainly don't want to have independent contractors having all of the similar benefits as an employee because the chances are they're going to look more like employees than if they were ever investigated or looked at by HMRC. Also, it's important for the business to look at what is actually in scope and out of school in terms of businesses and workers that are coming through consultancies also. In understanding, is it a statement of work that they're operating under or is it more time based and that they're brought in scope to these new changes? And as I said, communication is very, very key. Continue to communicate and continue to educate throughout all of the time from really from the very start of this in preparing
[00:41:24 Fergal Lennon ]for risk. [0.0s] And if we move on to the next slide, please.
[00:41:31] Fergal Lennon At the classifications, yes, at the heart of this is making sure that the independent contractors are properly classified, you will have the populations of independent contractors from your audit. You should have those. The business is required to do a comprehensive classification on a proper classification for the independent contractors and it's very much up to the business to ensure that it captures the independent contractors coming from all of the different channels. Those coming that are self sourced, those that are coming through staffing agencies and those that are coming through the management consultancies. That can be done internally. The company can do that internally by allocating resources to doing that. And the HMRC has introduced what it calls the CEST tool, which is Check Employment Status for Tax tool. Now, what that does do? It's an online questionnaire that they provide that people can go and see if they fall inside or outside IR35. I think somewhere between 15 and 20% of the results are inconclusive, tend to be in conclusive. And I also do know that people, if they want to get a certain result, can know how to game this tool so that by answering the questions in a certain way, you can get an answer that you're looking for. But you've got to look at who will be responsible for carrying out these classifications and understanding how that is all being done and feeding that back into the business. And next, we have the option, ofcourse of outsourcing on the next slide.
[00:43:37] Fergal Lennon So it can be outsourced and outsourced to a specialist that can help you to minimize your risk and there's an options of the specialist like MBO Partners did it being
[00:43:55] Fergal Lennon the fee payer [0.3s] sitting inside a chain or being a compliance partner sitting outside the chain. Next slide.
[00:44:07] Fergal Lennon And implementation, really. There is an awful lot to be done. There's over a year, a year to April 2020, so we've nearly have 18 months. However, there's an awful lot that needs to be done. And one thing that I would say is this cannot be started early enough for organizations that have large numbers of independent workers. This really needs to be starting as soon as possible in terms of planning and what we have broken down the implementation to what we see as 3 types of phases. Initially, phase 1, we would be indicating that should be started in quarter 1, 2019, which is working with small pilot populations of self sourced contractors potentially. But to get it moving and working the classifications, working and moving. And we've been doing this with our own clients in the U.K. also. Phase 2 then is more like a quarter to where you want to widen it out and try and identify any bottlenecks in the process and make sure that you're capturing all of the independent workers and you want to roll it out to the vendor 1, tier 1 vendors and other streams that come in to-- of independent workers that come in through the business. And phase 3, then in quarter 4, 2019, really wants to be tightening things up. You want to ensure that you're capturing everyone, re-educating and continuing to communicate and making sure that there is governance over the program also.
[00:45:58] David Cassar So far, we have less than 4 months to get started on addressing this.
[00:46:06] Fergal Lennon Well, what we have in Dave is we have-- it's April 2020, it comes in, so that gives a year effectively in 4 months. But what we're saying and what we believe and in the businesses we've been speaking to and the companies that we're working with, it's-- you really need to be starting now in terms of getting the planning, getting the visibility, getting the team together, because all of next year, well, while the rules will not come into place until April 2020, if you think you can wait until April 2020 to actually start implementing, you really have failed already because it's going to be difficult.
[00:46:56] Kevin Barrow I didn't endorse that, [1.3s] Fergal. We're seeing some major end users put in place the sorts of things you talked about. 2 things in particular will need, require people to take action. Now, first is that actually some assignments, the independent contracts are appointed to are actually quite long term ones. And actually already it's a mistake to be issuing any contracts that could extend beyond April 2020. You'll need to bring them to a natural end before then or face real problems. So they need to have
[00:47:37] Kevin Barrow imply [0.0s] already some process to prevent that. And the second thing is in terms of costing out large projects, they need to work out what their actual cost, because if they're going to have to gross up payments to these independent contractors, they're going to get their budgeting all wrong. And, you know, in addition, what we're seeing already is that the promoters of really aggressive tax avoidance schemes, the sorts of things that I know MBO's gearing up to try and help root out from the supply chain. But it already the independent contractors are aware that this legislation on its way and they are being targeted by promoters of very aggressive schemes. And if staff and companies don't-- sorry, if end users don't have their systems in place, sooner rather than later, they're going to start seeing contractors drift into these dodgy schemes. We can see contractors drift into these dodgy schemes even before 2020. Sorry, I went on a bit longer.
[00:48:50] David Cassar Excellent point. Yeah. Thank you.
[00:48:54] Fergal Lennon Thank you, Kevin. And really, the next thing that really is important to point 5 is really to have a written contract for all independent contractors. And the written contract needs to be, not just something on paper, it needs to reflect what actually happens on the ground operationally. And some of the key things the contractor needs to be contractor risk there is their needs to be a right of substitution. Most contracts have a right of substitution. But is it real? And I think that's something that needs to be addressed and people need to think think about how is that real, that somebody can actually come in the business because it is a business to business relationship. If the contractors outside IR35, if they can replace themselves with somebody else to do the work and that is acceptable as long as the work is done.
[00:49:57] David Cassar Fergal, excuse me, we have someone raising their hand. Carrie has a question. Carrie wanted to ask your question?
[00:50:05] Carrie Yup, I'm just curious. I wanted to understand some of the financial impacts and some of those risks. I mean, obviously, this is something that the U.K. is taking pretty seriously. But I know the question that I'll get asked by my leadership is, you know, what's the risk to Cisco and are we willing to accept that risk?
[00:50:29] David Cassar Excellent. Kevin, Fergal, wanna--.
[00:50:34] Kevin Barrow The normal-- [00:50:35]it's all individual contractors [1.9s] have different tax arrangements and the exact savings they currently have by operating outside IR35 varies contractor to contractor. But the normal thing accepted is that, their take home pay, at the moment, when they're outside IR35 will have a headline rate of tax of, say, 20%. So they're being paid a hundred thousand dollars a year, they're paying 20,000 dollars of insurance. That will go up to about 50%, 50,000 dollars. They're going to sit there and if you don't comply, you're going to be liable for that 30,000 differential per contractor. So if you've got a hundred contractors, it's a hundred times 30,000 per annum. So that's the rough-and-ready calculation. Then if you have to gross up, you're having to pay them another 50,000 dollars so that their take home pay doesn't go down.
[00:51:50] David Cassar I mean, Kevin, I would assume that HMRC would be interested in getting into the press some examples of companies doing this incorrectly so they can draw attention to it and maybe gain some traction, which could cause some brand damage to the end users.
[00:52:12] Kevin Barrow Yeah, they absolutely love it. Yeah, they will do that. Yeah.
[00:52:19] Fergal Lennon And just like that point--
[00:52:21] Kevin Barrow In particular, [00:52:22]that was a big beast, [1.1s] so to make an example of--
[00:52:26] Fergal Lennon One of the other financial risks as well is in reality, if you have a contractor that has been, as Kevin mentioned, operating outside IR35 and you classify them as inside, so you do the classification, they do not have a business to business relationships. You classify them as inside IR35, you have to account for all the payroll taxes. So you either say to them, hey, you know, the payroll taxes in the U.K. are 40% or close to up to 40%. So, you know, they're going to have to either be large additional cost to the business or a very significant reduction in Take-Home Pay for that contractor. Well, these are direct conversations that you need to have.
[00:53:13] Gene Zaino Yeah, so so to give an answer to Carrie, and Kevin, tell me if this is in the ballpark. I'd say the cost to the business is either going to be an uplift to the spend because you have to cover their taxes, which is or you actually if you misclassify them, the cost of the taxes and everything I've been seeing, the number I've been seeing is 25%. Is that kind of an executive level, quantifiable number to make a business decision?
[00:54:02] David Cassar Kevin, I don't know--
[00:54:05] Kevin Barrow yeah, that's about right, would say. As a lawyer, I probably give it a range of 20- 35.
[00:54:17] Gene Zaino OK, Carrie, does that help you?
[00:54:20] Carrie Yeah, it does tremendously. Thank you. I mean, it's so obviously there's the tax. Are there penalties on top of, you know, just the back pay and tax or is that not part of the overall scheme of the retribution?
[00:54:38] Kevin Barrow There are penalties, but they will increase it by not much more than that, there'll be material, but it's only 25, another 2 or 3 or 4 or 5 percentage points.
[00:54:53] Carrie Okay.
[00:54:53] David Cassar Yeah, because here in the states, the penalties could be as much as 80% of the pay.
[00:55:02] Kevin Barrow Yeah, they wouldn't be as [00:55:04]punitive. [0.0s] But the big difference is the actual primary liability is quite punitive.
[00:55:11] Gene Zaino Right.
[00:55:13] Carrie Okay, that helps tremendously. Thank you.
[00:55:19] David Cassar And there's some last points you want to make on your slides, Fergal.
[00:55:22] Fergal Lennon Yeah, I'm just in a summary slide now at the end of this. So we just move on Emily, please.
[00:55:30] David Cassar there it goes.
[00:55:31] Fergal Lennon Yeah. Really, the critical success factors are starting now, don't we? I mentioned that earlier on. There's a lot to ensure that you minimize your risk by the time April 2020 comes and it needs to start now because this is a very, very large scale project for companies that have a lot of independent contractors. Senior level buy in is key, really is key because people have to take this seriously. People will change unless they know they have to. None of us like change unless we know what we have to and it's necessary for the business and it's causing a very large risk, then the change will happen. And the rest really is, I would say, the other one dimension of mostly is communicate, communicate and communicate. And within that, I mean educate also really. And that they're the main points that I just wanted to leave you with.
[00:56:32] David Cassar Thank you. Excellent. Are there are other questions of the speakers or regarding IR35? We have one, can you briefly explain the factors that would determine someone is inside IR23 are covered by that ruling and should PAYE
[00:57:04] Kevin Barrow Broadly the same as 1099.
[00:57:09] David Cassar OK, so similar test as we have here in the States as it relates to common law or darvin or economic realities, but
[00:57:18] Kevin Barrow Exactly where there will be some points, minor points of difference.
[00:57:31] Gene Zaino Well, I think we're on time here, so nice job with managing the delivering this content efficiently. So thanks, everybody, and obviously our friends and clients and on the line, we're here to help. If you know this is an area that we certainly can help guide you along the way. But let's take Fergal's advice and not wait until March of 2020 to do it. There'll be quite a bit of stress. So, Kevin, thank you. And Kevin, you know, also is available for anybody that needs to have, you know, additional discussion. We'll be happy to arrange that.
[00:58:20] David Cassar All right, thank you very much. Thank you.
[00:58:23] Gene Zaino Thanks, everybody.
[00:58:24] John Piazza Thank you all. Bye bye.