IR35 – Payment Terms Throughout The Supply Chain

With the IR35 (off-payroll) reforms less than a month away, both agencies and contractors need to understand when the rules will apply and how to manage them compliantly.

To ensure you’re completely clear in your arrangements, HMRC has recently republished an announcement to clarify one important clause in the upcoming legislation: It’s the date of performance of the services by the PSC that is important, not the date of payment.

What happened last time?

In 2017, when similar off-payroll changes were made in the public sector, if engagements with PSCs (Personal Service Companies) were concluded by the end-user to be ‘inside’ IR35, many agencies offered to reduce the payment terms for PSCs they were engaged with in return for an early settlement discount or administration charge. Once agencies made these offers, they would ensure that PSCs received payment for ‘inside’ IR35 assignments before 6th April 2017 (the beginning of the new tax year and implementation of the reforms in the Public Sector) to avoid them being subject to tax and national insurance deductions.

If contractors weren’t paid early, and if the end-user deemed the assignment to be ‘inside’ IR35, then for all payments made to PSCs from 6th April 2017 onwards, tax and national insurance had to be deducted – no matter when the work was carried out.

What’s changing?

For the roll-out of the 2021 off-payroll reforms (due April 6th 2021), it will be the date of performance of work that decides whether the new rules apply or not, rather than the date of payment. This means that agencies should be less likely to need/be asked to alter payment terms with PSCs as we approach April.

Of course, it remains important that clients consider the agreed payment terms. However, this need is now less critical than before because the new legislation will be driven by the date of performance of services, rather than the date the payment is made.

However, it is important to remember that when a client is considering changes to the contractual terms for some or all their engagements, they must also think of the contractual notice periods required by all parties in the supply chain – not just the implementation date of the reforms.

How does this deadline work in practice?

This clause allows contractors to continue working ‘outside’ IR35 right up until the implementation of the reforms.

Looking at a relatively straight forward example, if a client had 30-day payment terms and a contractual notice period of 30 days, which was detailed in the terms between every party in the supply chain, then to be prepared for April 6th 2021:

• The client would need to have given the agency notice on Friday 5th March 2021
• The agency must have provided notice to the PSC on the same day (Friday 5th March 2021)
• The last day of PSC services under the agreements would be Monday 5th April 2021 (Easter Monday)
• The payment for those services (if invoiced immediately) would be made to the PSC on Wednesday 5th May 2021.

In summary

For the 2021 roll-out of the off-payroll reforms in the private sector, the date of performance of work is the deciding factor.

While this means PSCs can continue working this way right up to the deadline, it’s important to remember that if an assignment’s status changes (i.e. from ‘outside’ to ‘inside’ IR35), but the client wishes to continue engaging the contractor’s services, new contracts and rates must be agreed to reflect the contractor’s new employment status. And, if contracts and rates are adjusted because of IR35, then the contractual notice periods must be factored in to allow enough time for any necessary amendments to take place.

How we can help

We understand that IR35 reforms can be very confusing and difficult to understand, especially as we get nearer the deadline. If you have any questions about the upcoming legislation changes or how they will impact you, then please get in touch on 01244 684600 or visit our IR35 Plus Hub.

We’ll be happy to help you.