Who does IR35 affect?
IR35 affects every party in the supply chain, including you, your recruitment agencies and end clients.IR35should 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 is changing in April 2021?
Whilst how IR35 statuses is not changing, who is responsible for the determination is.
At present, if you work in the Private sector you are responsible for determining your IR35 status and ultimately for ensuring that the correct Tax and NI is paid.
Since April 2017 the rules have been different in the Public Sector. Responsibility for determining the IR35 status sits with the Public Sector body engaging you. If your contract is deemed “inside” IR35, then the party paying your Limited company, the “fee-payer”, must tax you at source as they would an employee on their payroll.
From April 2021 who determines your IR35 status depends on who your end client is. This infographic explains more. If you are engaged in the Private sector and working for a “small” end client nothing changes but if your end client is defined as “medium or large” by the Companies Act, the responsibility for the IR35 determination shifts to your end client.
Under the new legislation of 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 Status. 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.
What can you do now?
Unlike in April 2017 when there was little time to prepare, the Private Sector has two advantages to ensure contractors and end clients navigate these changes successfully. Firstly, there is time; time to speak up and engage with the whole supply chain. It is likely that your goal will be aligned with your end client in that they want to retain your skills and knowledge, work together to make well-informed status decisions to make this happen.
Secondly this time we have experience; experience of what happened in the Public Sector. We understand the pitfalls of knee-jerk blanket decisions, the impact of loosing key talent on critical projects and the effect of the changes on contractors take home pay.
Harness these experiences, enhance your knowledge of IR35, communicate with all involved and collect your evidence to support your IR35 status, you will be surprised how far this can go to supporting the correct IR35 status determination. For further ideas on how to protect yourself read our guide to April 2021 IR35 Reform: How to Protect Yourself.
Still not sure?
IR35 is complicated but there are many ways you can find out what you need to know. Read our Contractors Guide to IR35. and speak to an accountant here at Orange Genie Accountancy.
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.