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New IR35 legislation is designed to crack down on disguised employment by reclaiming what HMRC sees as lost tax and national insurance contributions. The Treasury expects the IR35 legislation to net approx £1.1billion in the first year alone.
At the moment, HMRC can check at any time for ‘disguised employment’, and if they decide that IR35 does apply, monthly payroll taxes and employee national insurance will need to be paid, but without any of the protections & benefits an employee might expect. Contactors with a limited company who do paid work for a client need to decide if the work they are are doing is inside or outside IR35, but from April, that decision and the responsibility to pay tax and insurance will move to the end client.
The government has some draft legislation on gov.uk but there is still a lack of clarity on how IR35 status will be determined, with various contributing factors. The government maintains that the self-employed won't be affected, and that the new legislation is merely an anti-avoidance measure.
Blanket assessments don't follow HMRC's own rules, so this news shouldn't come as a great surprise...Contrary to government advice, contractors who are likely to be affected should aim to prepare for IR35 before the April deadline. Use this guide to help protect yourselfConservative promises for a vague 'IR35 review' will be called into question in the next days and months as the April 2020 deadline looms on the horizonOff payroll IR35 changes will be rolled out to the public sector primarily. The new legislation will shift liability to the hiring company when determining a contractor’s IR35 status.
Public sector hiring companies are responsible for determining IR35 status for workers. The controversial online Check Employment Status for Tax (CEST) tool is used by companies to determine IR35 status, but assumes Mutuality of Obligation applies to all users of the tool - a viewpoint which is not reflected in Tribunal decision making or case law.
Medium to large hiring companies or agencies in the private sector will be responsible for determining IR35 status for workers.
The end client determines IR35 status and designs the determination dispute process, with no legislative guidance. That status determination is provided in writing to the worker and agency. The end client has 45 days to respond in writing if a contractor disagrees with their conclusion, and there is no right to appeal.
IR35 is determined through a combination of:
Personal service or substitution
Mutuality of Obligation (MOO)
Control
If HMRC decide to question your IR35 status, they will ‘look beyond’ the contract by examining working practices. Well written contracts insulate you from IR35 risk.
Highlight how a contractor assignment differs from the work of an employee
What are the limits of insulation?
Contractors need to limit the degree of supervision, direction and control their client has over what, how, when and where they complete their contract and day to day work.
Don't:
Do:
Disguised employment is a determining factor for IR35. Employment arises when there is an obligation for one party (employer) to offer work and an obligation for the other party (employee) to accept it. Contracts should clearly set out the work to be done and the outcome. Work outside the scope of the engagement should not be accepted, and if it is, the scope should be updated.
Don’t:
Do:
The best way to insulate an assignment from being outside IR35, is to use a contract that explictly puts the contractor outside of IR35. Use a robust contract, designed to insulate from IR35 application, and make sure working practises are consistent with the contract. Remember, contracts pass risk from one party to another, so don’t accept risk where you don’t have to.
Don’t:
Do:
The contractor should propose to the client that every 3 to 6 months they will bring in a substitute resource for a day of knowledge transfer and orientation.
The right of dismissal is the right of employers to terminate employment with statutory notice. As contractors or freelancers are normally brought in to provide a service with an end date or state in mind, such as the end of a project, it is best if to ensure there is no mutual contract termination period in the contract, sometimes called right of termination. Contract should only be terminated if one of the parties is in breach of the contract.
Contractors should show evidence of their own financial risk, and being in business for themselves rather than their clients. Contractors should aim to show as many of the following proofs of business on their own account as possible, as showing just one or two many not be enough for HMRC:
Company names
Contractors should never name their company after themselves, instead they should use a business name that reflects the work being done e.g. ABC Engineering and suggests that it is not necessarily a one person company.
Multiple clients
If possible, contractors should try to split their time fairly between two or more main clients, this makes it harder for HMRC to claim that the contractor is an employee of any of them.
Marketing materials
Contractors should be able to demonstrate their own marketing materials to engage new clients e.g. a website, listing on a relevant services website, or business cards. Branding should be never look similar to client branding.
Company insurance
Having their own company insurance like professional indemnity insurance, is a good way for contractors to demonstrate that they are not an employee.
Office space
Having an office, even one in their own home, software licences and professional memberships in the contractor company name implies that the work carried out extends beyond the current client.
Professional development
Paying for their own training is another way for contractors to demonstrate that they are in business on their own account.
Contractors should avoid being seen as “part and parcel” of the client organisation.
You need to show evidence of:
Do:
Don't:
Contractors should avoid having a client email address, but if the client insists on giving an email address, our advice is that the email address should clearly identify the contractor as an external resource
e.g. [email protected]
Contractors should use their own equipment wherever possible, but if they need to use client equipment it should be for valid technical or security reasons. At the very least, contractors should ensure that they use their own equipment when working remotely or from home.
External consultants should not be requesting annual leave which is what employees do, instead they should be make the client aware of the days that they are unavailable and give them as much notice as possible. External workers should not be using the client company’s holiday request forms.
Setting notice periods to 0 is considered IR35 compliant, but this is not very practical for clients. Our suggestion is that clients should be able to remove the external consultant with a minimal notice period (from 0 to 14 days). If the contractor hands in their notice, we suggest a more practical notice period of 30 days or more for the client, especially if the client regards their services as critical.
Hubbado suggested notice periods:
Financial risk is important, but substitution and control are stronger determining factors for HMRC when determining a contractor’s IR35 status. It’s important for a contractor to demonstrate that they are taking a financial risk, as the self-employed are likely to have a higher level of financial risk than an employee would.
Contractors should be able to show that they are investing in their own business for things such as training, tools, equipment and marketing. Where work is deemed faulty or substandard by the client, the contractor is usually expected to correct that work at their own expense and in their own time which also shows that the contractor is exposed to a financial risk.
Medium and large businesses will be affected by IR35 legislation, but “small organisations will be exempt”. A small company meets two or more of the following criteria:
Thomas Bennett, the founder of Henry & Co law firm, specialises in IR35 legal & contractual issues, offering options and advice for contractors on how to avoid IR35
Christian Faires, consultant at Forma, provides IR35 accounting and tax solutions to personal service company owners and directors. Chartered accountancy background and formerly Managing Director at a leading UK contractor accounting specialist firm.
Stuart Juggins, founder of Aardent, advises & leads the recruitment industry on building & using effective and compliant solutions using SOW & interaction with IR35. Former roles as the Group Head of Solutions for Adecco, Experis & European Head of Professional Services for several global Systems Integrators.
IPSE's deputy director of policy and external affairs, Andy Chamberlain, spoke about leading the fight for freelancers and contractors against IR35 at all levels of government.
Association of Independent Professionals and the Self-Employed
Visit the IPSE IR35 hub
An expert guide to contracting and freelancing, with specific
focus on how to beat IR35
Visit the Contractor Calculator IR35 guide
Find out about the off-payroll working rules (IR35) if you
or your worker provides services to a private sector client.
Private sector off-payroll working for intermediaries
Calculate the deemed employment payment for private sector
engagements where the off-payroll IR35 working rules apply.
How to calculate the deemed employment payment