WHAT IS IR35?
- Simply put, it’s an anti-tax avoidance scheme.
- It’s intended to prevent tax avoidance by business and individuals where individual contractors provide personal services to a business client via their own intermediary (i.e. a Personal Service Company or a partnership, known as a PSC).
- IR35 applies where, in reality and but for the PSC, the contractor would be an employee for tax purposes of the client or end user.
- IR35 is a tax rule – it doesn’t change a contractor’s status for employment law purposes.
- New provisions regulating the use of contractors in the private sector (for medium and large businesses) were due to come into force on 6 April 2020 but, in light of the COVID-19 pandemic, they are being delayed until 6 April 2021. IR35 was reformed in the public sector in April 2017.
- The changes to the rules will apply only to payments made for services provided on or after 6 April 2021 (previously the rules would have applied to any payments made on or after April 6 2021, regardless of when the services were carried out). Guidance can be obtained via HMRC's Employment Status Manual.
- Following a pre-introduction review in early 2020, the government has said that:
- businesses will not have to pay penalties for inaccuracies in the first year, except in cases of deliberate non-compliance
- new information from the changes will not be used to open investigations into PSCs for past tax years, unless fraud or criminal behaviour is suspected
- wholly overseas organisations with no UK presence will be excluded from the extended IR35 rules, and
- a new legal obligation will be introduced on organisations to respond to requested information about their size from the agency or worker, to make it clearer who is responsible for determining the worker’s tax status
HOW DOES THE CURRENT SYSTEM WORK?
- Put simply, the PSC decides what level of tax is payable.
- Under current legislation, it is for the intermediary/PSC (a company potentially controlled by the contractor) to determine if tax should be payable and to make any payments due.
- The PSC must examine the terms of any written contracts that may be in place and look at the circumstances in which the individual works and decide whether a hypothetical contract between the end user and individual would be one of employment or self-employment.
- The system is very poorly policed, and the government estimates that non-compliance could cost £1.3bn by 2023.
HOW WILL THE NEW SYSTEM WORK?
- Responsibility for deciding whether IR35 applies will be taken away from the contractor and placed on either the client or agency.
- The end client must take responsibility to determine if any contractor engaged through a PSC is employed or self-employed for tax purposes.
- The determination will be made using the same tests and factors as under current rules (subject to any clarification of employment status by the government).
- Liability for payment will rest with a newly created role of ‘Fee payer’ - the person immediately above the intermediary in the contractual chain (normally the client or agency).
- The client must set out the reasons for their assessment in a Status Determination Statement and must provide a copy to the contractor and intermediary before making the first payment under the contract.
- The client must also operate a dispute resolution procedure so as allow for an appeal against the assessment.
- They may also need to implement a review procedure.
DO THE NEW RULES APPLY TO EVERYONE?
- The new (and existing arrangements) only apply where a contractor provides services through a PSC, not direct to the client.
- An end user (and, therefore, the supply chain) will be exempt from the new provisions if they are regarded as a ‘small’ entity, i.e. if
- their annual turner over is not more than £10.2 million (corporate and non-corporate)
- they have a balance sheet of not more than £5.1 million (corporate), and
- if they have no more than 50 employees.
- An entity will always be regarded as ‘small’ for tax purposes in their first financial year.
- This assessment could include consideration of wider group and parent companies, and even, potentially, overseas companies.
- If an entity does qualify as ‘small’ and is excluded from the new IR35 regime, the existing regime will continue to apply.
HOW DO WE COMPLETE THE STATUS DETERMINATION?
- Put simply, take reasonable care to look at all the circumstances.
- The end user must exercise ‘reasonable care’ in making the determination. The obligation is to assess what the contractor’s status for tax purposes would have been if they had been engaged directly by the end user without a PSC. This involves taking account of a number of factors, including:
- Control and working arrangements – how much control does the end user have over the contractor’s hours and place of work? Can the end user direct how the work is done or is it highly skilled or specialised? Can the end user move the contractor to different projects?
- Substitution – can the contractor send a substitute? Have they ever done this? Can the end user reject the substitute?
- Mutuality of obligation – is there a binding commitment on the contractor or end user to provide or offer work?
- Integration into the business – how involved is the contractor in the business and its management? How would they introduce themselves to customers – as working for the end user or for themselves?
- Carrying on business on their own account – does the contractor take any significant financial risk? Do they need to make significant investments in equipment or tools?
- Other factors – for example, does the end user impose restrictions on what other work the contractor can do? Does the contract take up the majority of a contractor's time? Has the contractor previously worked for the company?.
IS THERE ANY GUIDANCE AVAILABLE?
- Yes, from HMRC and existing case law.
- HMRC has published a comprehensive set of guidance materials.
- HMRC operate an online tool, CEST, for assessing if a contractor would be an employee for tax purposes.
- The current tool may be limited in addressing the nuances of any given scenario.
- Recent high-profile cases in the tax tribunal demonstrate how subtle differences may change the outcome of the determination: see Christa Ackroyd Media Ltd v HMRC  UKFTT 69 and Albatel Ltd v HMRC  UKFTT 195.
WHAT SHOULD WE DO TO PREPARE?
- Review all working arrangements that you have with people who are not employed by the business. Ensure that you are aware of what engagements and contractual arrangements you have in place.
- Review your contracts with any intermediaries (whether that’s a limited company contractor or umbrella or someone else) and make sure they refer to the new regime (even if it’s a simple ‘if required by law’ rather than the actual name of the legislation).
- Ensure that any relevant contractual documentation states that the business (i.e. the end user) can deduct taxes etc if required legally, that deducting taxes will not allow or mean the normal fees increase to reflect the change and will also not change the relationship between the end user and the consultant/their personnel. Include a sentence saying that the consultant will co-operate in a timely manner with any requirements or requests by end user to comply with the new regime.
- Review who you are contracting with now and whether that falls within the new regime? If yes, when will you do the status determination and inform the consultant – bear in mind the SD must be done before the first payment.
- Assess your contracting needs in the near future. Is it time to review how they work with contractors? Should any of these contractors be brought in-house and become employees instead?
- If you decide to do this, ask the contractor to waive any contractual claims they have against the company and its employees to at least reduce your potential exposure. Only a settlement agreement will constitute a valid waiver of employment claims but that needs to be considered carefully and commercially. Also, try to get a clean break between ending the consultancy agreement and any new employment.