They say a week in Politics is a long time. For Contractors the last week must have felt like an eternity.
On 17 March 2020 government announced that it will be delaying the roll out of the “off payroll worker rules (commonly known as IR35)” until April 2021, right now all we can say is better late than never.
What does this practically mean?
IR35 is still an issue that all contractors need to address and manage. The IR35 rules have been in place since 1999.
Brief Outline of IR35
IR35 essentially means that if you behave like an employee, you get taxed like an employee, irrespective of the vehicle through which you operate. There is lots of case law going all the way back to the 1960s which sets out the framework for how to determine employment status. Based on this caselaw the three primary tests to determine status are:
- The right of control of how work is completed;
- Whether there is a right to provide a substitute, which is not unreasonably fettered;
- Whether or not the worker and employer have a mutual obligation to respectively deliver and pay for the services on an ongoing basis.
Please feel free to contact us if you would like to understand how these might practically apply to you in your particular circumstances.
Pass any one of the above tests and the contract should be considered self-employed and as such outside the scope of IR35. Although HMRC’s CEST tool still fails to interpret these correctly, particularly in relation to mutuality of obligations!
The reforms, which has now been delayed until April 2021, were not changing any of this. What will be changing from April 2021 will still be:
“When working for a Medium/Large sized company in the Private sector – responsibility for determining the IR35 status for “contractors” transfers from the contractor to the end client. (This has been in place in the Public sector since April 2017).”
It also means that if an end client treats a contractor as not caught by IR35 who is subsequently found to be caught, it is the end client that is on the hook for the associated additional taxes. Inevitably therefore, we were seeing that most big corporates were being incredibly conservative. This was particularly evident in the financial services sector, where HSBC started the trend of simply refusing to deal with limited companies. It remains to be seen whether they will relax this policy in the light of the delay.
So what should be your next steps?
Communicate with your end client and agency. Make sure they are aware of this recent announcement and check whether they will allow the “status quo” to continue. Fingers crossed it will be business as usual!
Keep this line of communication open with them. You have 1 year to convince them that you are “self-employed” so that post-April 2021 they will consider you outside of the scope of IR35.
Suggestions:
- Build your case. The HMRC CEST tool is available to you.It has some interesting quirks.Try out different potential answers…
- Results from the test are not stored anywhere by HMRC. You can take the test as many times as you like.
- Whilst this cannot be used to give you a 100% certainty of being outside IR35, it can be used as a significant key indicator. HMRC have stated if the tool provides you with a verdict of being outside IR35, as long as the working practises and written contract accurately support the answers you have provided in the CEST tool they will accept the verdict.
- You will need to do a review for every contract you work through
- We would also suggest getting your contracts reviewed by an employment status specialist such as Chartergates. Whilst the tool is useful, it is not complete as it has no specific questions with regard to Mutuality of Obligation, as such even when it provides an undetermined verdict it is still highly possible that you would be considered outside IR35. A formal review from a specialist would carry more weight. This may cost you a couple of hundred pounds but could ultimately prove money well spent
- Such reviews often suggest ways of strengthen the written contract, engage with your agencies and end clients in discussions as to how to improve the contracts. Whilst IR35 is a status test and HMRC will quote “substance over form”, it is important to remember the first piece of any evidence for an enquiry to be reviewed will be the signed contract, so form a good first impression.
Should you have any queries on any aspect of the above, please get in touch with one of our friendly experts.
Stay right up to date with all the latest developments and guidance on our Coronavirus Updates page.