IR35 was introduced in 2000 and is aimed at ensuring that only contractors genuinely in business on their own account are able to take advantage of tax planning opportunities. If in effect, you are a temporary employee of your end client you will be taxed as a “deemed employee”.
With the up and coming changes to IR35 due in April 2021, now is a good time to remind ourselves of the basics.
Who does IR35 affect?
IR35 affects every party in the supply chain, including you, your recruitment agencies and end clients. IR35 should be considered for each new contract, contract amendment and extension.
What does it mean to be caught by IR35?
If “caught” by, or “inside”, IR35 you will be deemed an employee and will pay tax as an employee. Whilst your IR35 status determines your tax position it has no effect on employment status, so despite paying the same tax as an employee, you will receive no additional employment rights.
If “not caught”, or “outside”, IR35 you are deemed to be in business in your own right and a business to business relationship exists. You are then able to plan how best to extract funds from your own company to suit your needs and minimise tax.
How is IR35 determined?
Traditionally IR35 statuses have considered three key areas known as the “holy trinity” of employment tests; Personal Service, Control and Mutuality of Obligation. The proposed April 2021 legislation make no changes to how IR35 is determined and these tests will still be used.
Personal service will be deemed to exist where you are required to personally provide your time and skills to an end client. In order for IR35 not to bite you should be able to send a substitute in to undertake the work, assuming they have the required expertise and experience. Remember that the end client is engaging with your business and therefore it won’t necessarily be you that attends to undertake the role.
Control is a measure of how much direction the end client has over you. In a traditional employment relationship, an employee is very much under the supervision of a line manager, they have their working hours and locations dictated to them and importantly they are often told how to do their job. To be outside IR35 you need to be able to demonstrate that you work autonomously, that you use your expertise to complete the role with no direction as to how your fulfil the project requirements; whilst you may have a senior point of contact you do not have a line manager.
Lack of mutuality of obligation is key to an outside IR35 status. There should be no expectation either during the project or at the end that you will accept other roles offered by the end client or indeed that these are offered at all. Your contract should reflect that you can be released from the contract at any time with minimal or no notice and there should be clear boundaries set as to what you have agreed to undertake as part of the engagement.
In addition to the “holy trinity” over recent years the courts have also considered the concept of a contractor becoming part and parcel of the end client that they are engaged by. You should be conscious of not slipping into a “business as usual” role or taking part in the end client’s normal activities usually associated with employment. As you are running your own business its important that you don’t wear a company branded T-shirt or name tag, that you are not held out as an employee of your end client and that you don’t accept that free gym membership!
What happened in April 2021?
When the legislation first came in, contractors were responsible for determining their own IR35 status and ultimately for ensuring that the correct Tax and NI is paid.
In April 2017 the rules changed in the Public Sector. Responsibility for determining the IR35 status was shifted to the Public Sector end client.
From April 2021 this reform was extended to include medium and large private-sector clients as well. If you're engaged in the Private sector and working for a “small” end client you're responsible for your own IR35 status, but if your end client is defined as “medium or large” by the Companies Act, the responsibility shifts to your end client.
If your end client is responsible for your status determination then they must show that they have used “reasonable care” in coming to their decision and they must share their conclusions and reasons with you in a Status Determination Statement. This document must also be shared with the recruitment agency that you are engaged through as they will need to understand your status and ensure that they apply the correct taxes when paying your invoices.
What if you disagree?
If you are unhappy with the decision taken by your end client you have the right to appeal the decision. This appeal is made to the end client, the same party who made the original decision. Within 45 days your end client must consider their decision and either re-affirm their original conclusions or provide a new Status Determination Statement with reasons if they agree that there was an error originally.
As it stands there is no legislative right of appeal to HMRC or any form of arbitration if you are still dissatisfied with your end client’s decision. Practically at this stage, your only options are to accept the decision or look for an alternative contract. In theory, you could seek to reclaim on your self-assessment any taxes you feel have been incorrectly deducted but in effect, you are asking HMRC to investigate your contract at this point, which is costly in both time and money.
Still not sure?
If you are concerned about your status and would like some professional input, we are happy to talk you through your situation. We can also introduce you to Bauer and Cottrell our recommended IR35 legislation experts. Led by Kate Cottrell, a former HMRC Inspector and member of the IR35 forum, Bauer and Cottrell have been at the forefront of the policy decisions and HMRC’s proposed changes. They will review both your contract and working practices between you and your end client, providing you with both an IR35 assessment and possible enhancements and changes to strengthen your position.
If HMRC does decide to review your status, Bauer and Cottrell will support you and put the facts to HMRC; they are yet to lose a case, so you know you would be in safe hands.
To find out more about Bauer and Cottrell or how Orange Genie Accountancy can help you with setting up your limited company, please call 01296 468 185 or email email@example.com