HMRC introduced IR35 (off-payroll rules) as a means for assessing whether individuals who work through their own Ltd company (Personal Service Company – PSC) i.e. contractors, are in fact a genuine contractor, rather than a ‘disguised’ employee, for the purposes of being accountable for paying tax.
Organisations that use contractors benefit from not having to be responsible for paying employers national insurance contributions (NIC’s) or provide contractors with recognised employee benefits. The advantages for the contractor are the potential tax efficiencies. Variations to the IR35 procedures which come into effect for the private sector from the 6th April 2020, transfer the obligation for determining whether a contractor should be considered an employee, from the contractor, to the end user, i.e. the Client. Where it is determined that IR35 does apply to a contractor, and they are therefore considered ‘inside IR35’, the entity that pays the contractors fees is determined to be their employer, and therefore liable for employers NIC’s, apprenticeship levy (where appropriate), employee benefits etc.
Within the reformed IR35 rules the client will be responsible for completing IR35 checks on all existing contractors engaged with the organisation, before the implementation date, and before any future contractors are appointed for their services going forward. The outcome of the assessment must be communicated to the contractor and any ongoing-intermediary (agency etc.) through the provision of a detailed Status Destination Statement (SDS). Should either disagree with the assessment outcome they have a right of appeal which must be made within 45 days.
Once these processes have been completed the IR35 liability moves to the fee payer which would mean in the majority of cases the ongoing-intermediary. If it is identified that reasonable care was not undertaken in determining the contractor’s status the liability would remain with the client.
HRMC provide an online tool – Check Employment Status for Tax (CEST) to assess whether a contractor is inside or outside of IR35. However there continues to be general consensus that CEST is currently unreliable despite the introduction of a revised version in November 2019. The latest news is that HRMC are reviewing CEST again before the April deadline.
There are a number of factors that HRMC use in determining whether or not a contractor assignment is inside or outside of IR35. However, the three factors considered to be the most prominent include;
Control and Direction
What is the extent of control that the client has in where, when and how the contractor completes the work
Can the contractor demonstrate a certain degree of autonomy in the way that they work.
Personal Service – Substitution
Substitution is the ability of a contractor providing the service to supply a replacement contractor to carry out the service
A contractor must be able to demonstrate that their end client does not need them to personally deliver the service.
Mutuality of Obligation (MoO)
Within a contractual arrangement a contractor will typically provide a fixed amount of work and invoice the client. There would be no expectation of any further work to be offered at the end of that contract
Broadly speaking if there is an obligation to offer/provide further work and there is an obligation to accept this, then MoO would be established between the contractor and the client.
Some of the other factors that HRMC would consider, include;
Provisions of Equipment – does the contractor use equipment provided by the client, or do they use their own?
Financial Risk – how much financial risk does the contractor have? If all the risk remains with the client this would indicate being inside IR35
Part and Parcel – to what extent has the contractor become a part of the clients company?
It is important to recognise that HRMC will look at what actually happens in practice. Should a contractor be identified as falling within IR35 in one or more areas this does not mean that a contractor is automatically considered to be within IR35.
Undertaking an accurate evaluation of a contractors IR35 status is complex and requires in-depth knowledge of the individual contract/project requirements, as well as, an unambiguous understanding of the organisations own working practices.
These procedures are required each time an organisation looks to engage with a contractor or extend the existing contractual arrangements.
Should the client make an assessment that a contractor is outside of IR35 which is determined by HRMC to be incorrect, and therefore inside IR35, the implications for the organisation would be – HRMC would recover any tax and NIC contributions owed (potentially up to 6 years), plus interest and apply potentially a financial penalty. In addition, the contractor may look to request full employment status and recover all employee benefits – backdated.
In preparation for the IR35 reform it is necessary that organisations;
Identify and review their current arrangements with intermediaries, to include agencies and PSC’s/contractors
Put into place comprehensive procedures to determine the employment status of contractors
Review internal systems and procedures such as on-boarding, training arrangements, policy and procedures to ensure that contractors don’t automatically fall within the IR35 rules.