Contractor FAQ – Reforms to IR35 in the Private Sector
What is IR35?
IR35 is the more familiar term for the Intermediaries Legislation (originally introduced as part of the Finance Act in 2000). It is tax legislation brought in to combat disguised employment.
One of the major concerns regarding IR35 is how complicated it is. Some roles are very distinctly either inside or outside of the rules but boundaries can be ambiguous. It can make assessing status difficult even for those who understand the legislation well.
What is the current law surrounding IR35?
In the private sector, individual limited company contractors (PSCs) can determine their own IR35 status.
In the public sector, assignments are assessed by the end client to determine whether they are inside or outside of IR35. The feepayer, either the client if you are contracting directly or the agency if they are part of the supply chain, then applies this determination and in turn, the correct payment mechanism. The feepayer remains liable, if in the event of an HMRC investigation the determination is found to be wrong.
What does it mean to be inside or outside of IR35?
In short, this indicates your IR35 status:
Inside (the IR35 rules apply), you are perceived as an employee for tax purposes so all deductions i.e. tax and National Insurance (NI) must be made at source
Compliant methods of engagement
- Agency Paye,
- Umbrella company
- Deemed (Paye to an individual’s limited company)
Outside (the IR35 rules do not apply) you are perceived as being a genuine contractor for tax purposes
Compliant methods of engagement
- As above and also via limited company (gross)
Indicators of ‘Employment Status’
There are roughly a dozen but the key ones are:
- Personal Service and Substitution – Providing a service yourself or sending someone in your place
- Mutuality of Obligation – An obligation for a client to provide work and for the worker to accept and personally carry it out
- Supervision, Direction and Control (SDC) – The control a contractor does or does not have over how they carry out their work
It is important to remember that contracts alone do not determine IR35 status. More than ever, your true working practice for example, do you assume true business risk (and mitigate accordingly, by the carrying of an appropriate insurance provision that will respond in the event of a claim against you for the services you provide) alongside what is really happening on the ground, must reflect the tax status that is being claimed.
When will the new legislation come into effect?
Draft legislation was released on the 11th July 2019 with final legislation expected in the Autumn. It will come into law on the 6th April 2020.
What will the changes look like?
At present, the reforms will be similar to those introduced in the public sector in April 2017. Legislation will move the responsibility from the PSC and place an obligation on the end client to assess the IR35 status of a role/assignment. It will then be the feepayer who is responsible/liable for applying that determination.
The client will need to be able to demonstrate that they have taken ‘reasonable care’ when making their determination.
What will be different to the public sector?
Draft legislation confirms:
- Small companies will be exempt, the definition of which will likely be based on the Companies Act 2006:
- Turnover < £10.2m
- Balance sheet total < £5.1m
- Employees < 50
If you secure an assignment with a ‘small company,’ you will continue to determine your own status after April 2020.
- The end client will retain liability until they deliver a status determination to the party they contract with AND the worker/you
- A contractor will have the right to appeal a determination and the end client must have a process in place to effectively manage and respond to these challenges within 45 days of the challenge being raised. They must be able to evidence that ‘Reasonable Care’ has been taken in making the determination. At present, this can only be done through your tax return.
- There is greater emphasis on the end client being able to evidence fair and correct determinations, not just ‘safe’ ones i.e. all inside of the rules.
- One of the key issues is control in respect of IR35 and determining self-employment status. Control over how a worker carries out a specific piece of work is particularly relevant; can you demonstrate an autonomy over how you carry out your work?
What does this mean for me and how else can I work after April 2020?
There remains the potential to continue working through your limited company. It is thought that around a third of contractors will be affected so many roles will remain as outside of IR35 but this determination will ultimately rest with the end client. The onus will be on them to get this right. If your role is ultimately inside of IR35, this should be the case for any end client BUT if you believe otherwise, challenge the determination. Ultimately, a client calling all roles inside of IR35 regardless of whether this is correct, risks losing contractors to competitors who have a more robust determination process in place.
HMRC has provided a Check for Employment Status for Tax (CEST) tool that end clients, agencies and contractors can use to help determine their status. Unfortunately, it has been widely criticised as ineffective for roles that are not clearly inside or outside.
There will be increased due diligence required from the end client and/or the agency where they are present in the supply chain and then in turn the contractor for all roles deemed outside of IR35. There will likely be a test of ‘reasonable care’ and a requirement for a contractor to amongst other things, provide an independent IR35 assessment as a minimum.
Alternatively, if you current contracting role/skill set is likely to be called inside of the rules and this is not a way in which would like to work there is the option to:
- Look at permanent roles
- Contracting opportunities outside ok the UK
- Statement of Work (SoW) solutions – Working as a team on an end to end project delivery
Talos Automation currently offer opportunities in all areas and will also shortly be engaging with a new partner to help support IR35 assessments and provide guidance moving forward. If you have any questions, would like any clarity around some of the issues outlined above or just a wider conversation around opportunities, please contact Darren Day at firstname.lastname@example.org. We have been living and breathing IR35 for almost 20 years now, let us help!