Last week we hosted an IR35 event. We wanted to bring together our clients and contractors so that we could have an open forum where knowledge would be shared and we could all learn. It was interesting that so many contractors turned up, but almost no clients. I really thought it would be the other way around particularly as many contractors are fully educated on IR35. They’ve had to be – this legislation isn’t new, it’s been around for 20 years and the real major change that is happening in April 2020 is that determining whether a contract is inside or outside of IR35 will move from being the contractors’ responsibility to being the hiring businesses’ responsibility. Up until recently, hiring businesses would have never had to know anything about IR35 (unless they themselves were a contractor) so I really thought that they’d want to come along to hear about problems being faced, ways of resolving them, options open to them and to share knowledge with other industry peers.
The event kicked off with Clarke Bowles from Parasol giving an overview of IR35, the changes happening, what happened in the public sector when these changes were introduced 2 years ago and how best to prepare for the changes in the private sector. Because it was mostly contractors in the audience, Clarke tailored his presentation for them. We then had a Q&A session from Nicola Hayman, legal manager from Kingsbridge Insurance. Nicola really knows her stuff and was happy to take questions from the floor – more on this to follow… Despite these two working for big names in the world of contracting, it was clear that they weren’t there to pitch their companies – they joined us to educate and to get us talking and thinking about the changes. So, in the spirit of educating and sharing, I wanted put out some of the questions and answers along with insights from the evening. It might be useful information that can be shared with clients and may prompt the start of conversations between hiring companies, recruitment agencies and contractors so that we can all start working together to make the most of these changes and to be ready for them.
Q1. Are there any ways that a Ltd company / Personal Service Company (PSC) can avoid the new changes to IR35?
A1. Anyone who promises you a way around IR35 should be considered very carefully. The changes to IR35 are not avoidable and rather than spending time seeking an alternative route, time is best spent making sure you have the right contract and considering your work and business trading practices.
Q2. What tweaks would you recommend for a contractor who might feel they are borderline as to whether they are inside or outside of IR35?
A2. As frustrating as it may seem, you will never truly know whether you are inside or outside of IR35 until you are sat in a Tax tribunal and a judgement has been made one way or the other based on the evidence they have gathered from your working practices and contract. However, HMRC have placed a lot of importance on 3 main areas, and it is what their determination tool (CEST) is based on – Substitution, Control and Mutuality of Obligation. If you look at case law, people who have satisfied strongly one of these areas, have been seen to be outside of IR35. So you should look at these 3 areas, see where you are strong and in the areas you are not so strong, talk to your clients and try to educate them as much as possible so that you can make any necessary changes.
Q3. What was the experience of contractors in the public sector who were outside of IR35 by their own determination but found to be inside when the new legislation came in?
A3. Nothing has happened yet and HMRC have said they will not go back retrospectively but you should speak to your accountant about this. HMRC will be able to see if you have switched from outside to inside on 30th April 2020 and they keep records for a long time. Some public sector contractors who did this may be thinking they have got away with running their company for a number of years, working outside when really they should have been inside, but who knows how HMRC will view this in the future.
Q4. If I take on a contract in April with a new client and that client give me a determination that says the contract is outside of IR35 and six months later HMRC say it is inside, who is liable for the unpaid taxes.
A4. The end client – so whoever is paying you for your services. It is the responsibility of the end client to take reasonable care in stating whether a contract is inside or outside of IR35. It is your responsibility or that of the agency you are working through, to understand how a client makes this determination. Do they use CEST or other tools, how are they making this decision? So for a client, all they have to do is make sure they are taking reasonable care in determining the status of the contract and if there is a fee payer in the chain (so a recruitment agency if most instances), then that party will take on the tax liability.
For HMRC this is a good thing. Recruitment agencies know about IR35, they are all working to get their own processes in place as to how they will work with their clients and contractors with this new legislation. They are trying to get their clients more engaged, show how they can help them. For clients who fully understand the legislation, they can see that it is a good thing to have a fee payer in the chain as it is taking away a lot of that liability.
Q5. Is this the death of the rolling contract? Does this mean that every 6 months you’ll sit down with the client and work out what needs to be worked on and what they are looking for you to deliver for the next 6 months?
A5. Technically, the duration of a contract doesn’t dictate whether you are inside or outside of IR35 (although if you have been somewhere for 5 years doing exactly the same job as a permanent employee beside you, then your contract should probably be inside of IR35!) as it is not one of the tests that is carried out. If your contract is fully satisfying one of the three main tests - Substitution, Control or Mutuality of Obligation and the company you are working with isn’t just issuing you with a contract that has your job title in it, but considers the project and deliverables, then it shouldn’t matter how long you are providing your services for them.
Insights from the evening:
HMRC got back £550 million in taxes when they brought in the new legislations in 2017 to the public sector. They are expecting to get a lot more in tax payments from the private sector and are estimating additional taxes from 1 in 3 of existing contractors who are trading as Ltd companies.
HMRC have actually done a very clever thing by changing the determination decision from contractor to end client - it will be much easier for them to investigate whole businesses rather than trying to investigate 3.3 millions sole trader Ltd companies entities. This one small change from HMRC hasn’t cost them any more money, they haven’t had to employ any more people and they will still have the capacity to carry out 250 investigations each year!
All this may seem alarming but it is not meant to scare everyone. Many contractors should be confident that you are working legitimately and if this is the case, then it will help if you regularly review the way you work and you may need to make a few tweaks. Every PSC will be different and the work you do may vary from client to client, so it’s worth understanding how they engage and work with contractors eg Are you shown to be a contractor in the business – ie do you have “contractor” on your lanyard, is your email address different to other people in the business, does your email sign off show you to be a contractor, do you have restricted access to different parts of the business, from physical locations like the gym to digital areas like the company intranet.
HMRC has said that the public sector transition was smooth. It wasn’t, it was a total disaster but they did get a lot of taxes back. The recruitment industry, businesses and contractors need to be prepared for 30th April 2020 to avoid disruption to our own businesses and the best way to avoid that disruption is for the 3 main parties to all be talking to each other. This is one of the key recommendations from HMRC too - HMRC Guidance for businesses preparing for IR35 changes. So, let’s look at which contracts really do fall inside of IR35 and work out how best to deal with them. Let’s make sure contracts and work practices for outside or IR35 are all in place and for those that are border line inside/outside or IR35, talk to the contractors and start to test your test tools to determine them one way or the other.
We’re going to be sharing more Q&As over the coming weeks and months, but if you are a client or a contractor and you have any questions or are seeking advice, then let us know and we’ll do our best, via our legal and contracting advisors, to help. PCR Digital is a member of APSCO.