IR35 and the Proposed Changes

As we know, the IR35 ‘off payroll’ rules will be extended to the private sector from April 2020 onwards, directly affecting a large number of contractors.

From the conversations that we have held with many market experts, we believe that this is likely to impact around 10% of the flexible work force.

But we do need to review what this means from a legislative perspective, and what can contractors and clients do to prepare in advance?

What does the IR35 private sector reform mean?

Background

The Intermediaries Legislation known as IR35, has been around since late 1999 just before the tech boom. In basic terms the objective of the legislation was to remove what was perceived by HMRC as tax advantages of providing services via a limited company for individuals, who are not truly in business on their own account. Another way that HMRC often refer to this is ‘disguised employees’.

During the last 20 years, there have been numerous amendments to IR35, but none have ever been clear enough for either HMRC or contractors to definitively assess status.

In April 2017 we saw a dramatic shift in strategy from HMRC and in one failing swoop they deemed contractors working for public sector organisations were all inside IR35. They achieved this by passing the potential risk to the engager of each contractor, i.e. the end client (public sector departments).

Why is HMRC so keen to amend IR35?

Quite simply it’s all about the money. HMRC expects this new measure to net £1.3bn per year by 2023. But that doesn’t take into account the fact that a number of contractors may leave the UK (brain drain!) and a lot may well resist any changes because they could be deemed unfair.

What changed in the Public sector?

Where a contractor is deemed to be ‘inside’ IR35, the client was forced to deduct employees’ NICs and income tax from the contractor’s pay, as well as paying employers’ NICs (which makes them employees in my book!)

What is available to assess status?

We had the BET (business entity test) for a short time and this aimed to provide a points-based test. It was, however, a self-driven assessment and, ultimately, when empowering the person that pays the tax to determine status, this was doomed from the start.

Unfortunately, HMRC then launched the CEST (Check Employment Status Tool).

The aim of this was to help work out whether or not a particular contract falls within IR35, HMRC released an online tool shortly before the public sector rollout in early 2017.

When using the CEST tool, you work out whether or not “a worker on a specific engagement, should be classed as employed or self-employed for tax purposes.”

Using a very basic multiple choice system, the tool collects information, such as:

  • Does the contractor provide their services via a limited company?
  • Is the contractor an ‘office holder’?
  • Can the worker provide a substitute (or have they already)?
  • To what extent does the client exert control over the contractor, e.g. can they move the contractor to a different role/location, decide how and when the work is done, etc.?
  • What happens if the client is unhappy with the contractor’s work?
  • How is the contractor paid – fixed price, or by the time period?
  • Does the contractor receive any ’employee’ type benefits from the client?

Once the answers have been processed by the CEST tool, you have a screen pop up with a Pass or Fail. You can download a summary of your answers, and how HMRC has interpreted its understanding of IR35 as it relates to each employment status factor, which initially sounds perfect as you have evidence to prove you have tested a contract and also shown a pass/fail.

However, in some cases, the tool will be unable to determine employment status at all which is very unhelpful. Equally, you can simply delete a test and do it again to get the result you want, which is of course ridiculous!

Even when you have the result HMRC place a lot of strong warnings on the summary screen.

Good news

HMRC say they will ‘stand by the result given unless a compliance check finds the information provided is not accurate.’

HMRC also say they will not stand by results achieved by fooling the CEST tool – by entering contrived arrangements, hence contracts will still be key as will working practices

IR35 for private sector proposed changes

At the 2018 Budget, the Chancellor mentioned that the ‘off payroll’ rules will be extended to most private sector businesses from April 2020. It should be known that he wasn’t as forthright in the Autumn statement and has been very quiet this year about this.

Who is excluded from the rules?

‘Small business’ clients will be excluded, which is great news. But this doesn’t help contractors engaged in substantial projects with large businesses (Banks/Investment houses, etc.).

What happens next?

We hope that HMRC will learn from the widespread problems associated with the public sector rollout.

What should contractors do?

Certainly, the 1st thing is not to panic.

In the event you were contracting many years ago, it is probably worth remembering that the contracting industry has survived all manner of changes over the last 20 years. I also recall many market pundits predicted the demise of the profession when IR35 was first mentioned in 1999, clearly, that didn’t happen.

Who may be affected?

Unlike the public sector rollout, it seems likely that most private sector contractors will be impacted by the April 2020 changes, as many work for large clients, not ‘small organisations’ (of 50 individuals or less).

However, given the timescales before the new rules come into play, and the fact that the finer detail has yet to be worked out, it might be premature to take any action right away.

Contracts

In the meantime, you (as a limited company director) remain responsible for determining your IR35 status as you know. It is therefore our recommendation that you should consider seeking contract reviews for any new engagements, and also consider having tax investigation insurance just in case (it is relatively inexpensive and we offer this via Croner Taxwise).

What should your clients do?

Most large companies depend on short-term contractors, hence this is going to present them with significant challenges and it is unsurprising that many industry groups have urged clients to start making arrangements right away – to ensure they are ready to take on their new responsibilities in April 2020.

What should you be doing?

Speak up

Without question discuss this to ensure your clients are involved, equally any recruitment agency, make sure that they are taking the necessary steps to make well-informed status decisions with you.

As a contractor, it’s also worth you speaking with other contractors who work for the same client before approaching your engager together (the power of more than one is often helpful). Large companies will not be able to shelve projects as the Public sector did, so by doing this, they are more likely to listen and work with you.

Your client and agency need to understand that by collaborating with you and your contractor colleagues, they have a much better chance of setting IR35 status accurately and remaining compliant.

Request a Confirmation of Arrangements (CoA)

This is a letter or document outlining that each party in the contractual chain agrees on the IR35 status of a contractor. It can be key when shutting down an IR35 enquiry because it will reflect the true nature of the working relationship you have with your client.

It should outline the specific reasons that your working arrangement belongs outside IR35 – like having the right to provide a substitute, proving that Mutuality of Obligation and control don’t exist – and could be used to safeguard your status when the rules change next year should you remain on the same contract.

IR35 contract review

In the event you have seen or heard of something that leads you to believe that your client/agency will make risk-averse or inaccurate IR35 decision, we urge you to seek a second opinion. By having your contract reviewed by an independent and unbiased expert, you will be in a strong position to challenge and potentially overturn a wrong assessment.

Gather evidence

It’s important that you have a strong case for working outside IR35, so gather as much evidence as you can to demonstrate that you don’t look and feel like one of the employees of the business. This matters even more now, given you will soon not be setting your own status.

In addition to collecting information that proves you :-

  • have a right to provide a substitute
  • do not work under the direct control of the client
  • are not mutuality obliged to carry out the work
  • it’s also worth thinking about any other ‘evidence’ that strengthens your argument.

This could be, for example; documents showing you take a financial risk, are not ‘part and parcel’ of the client’s company and even having your own company website and stationery, equipment and maybe even office space!

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