One month on… how has IR35 impacted you and your business?

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It’s been a month since the long-anticipated changes to IR35 came into effect. Steve Deverill hosted a webinar with Paul Lloyd, of Brookson Group, and Tony Evans, the Co-Chair at the Institute of Interim Management, to look at the early indicators of how the changes have impacted those affected.

You can watch to the full webinar here.

Quick recap of the changes to IR35

IR35 is the HMRC’s ruling for off-payroll working and is designed to capture “hidden employment” where contractors are working as employees but avoiding tax responsibilities. The changes, which came into effect from 6th April this year, shifted the responsibility to determine IR35 status to the end user (or client).

Small companies are exempt from IR35, but they must be able to satisfy two of the following rules, for two years in a row:

  • No more than 50 employees
  • Annual turnover of less than £10.2 million
  • Balance sheet total of less than £5.1 million

Companies who are currently exempt as a small business but might be moving into the medium company category should prepare for IR35 compliance in advance.

What is an SDS (Status Determination Statement)?

A major feature of the new IR35 is the Status Determination Statement.

  • Advises on the employment status for tax purposes
  • Details the reasons as to how the decision was made
  • Must be communicated to the agency and the worker
  • SDS must be prepared with “reasonable care”

What challenges have companies faced because of IR35?

With many businesses relying heavily on contractors, the changes have caused a huge amount of additional work. The first major hurdle was identifying the contractors and interims who were off-payroll, and then in deciding how to assess their IR35 status. After a determination, employers need to decide what solutions they can offer contractors and interims who find themselves outside of IR35, and how to onboard those who are deemed inside IR35 (and therefore employed).

What is reasonable care?

Reasonable care requires hirers to take the necessary steps to correctly audit their self-employed workforce.

HMRC have released a lot of employment status manuals to help end users in their IR35 determinations. Number 14 relates to reasonable care and gives advice on what does and doesn’t constitute reasonable care.

Whats is CEST?

HMRC’s CEST (Check Employment Status for Tax) is an online tool designed to help employers quickly determine the IR35 status of contractors.

CEST has been heavily criticised as it doesn’t follow case law sufficiently; it doesn’t look at working contracts, only working practices. These issues lead to up to 20% of results being returned as undetermined. Employers must then take expert advice to determine IR35 status and ensure they remain compliant.

CEST results breakdown:

  • 20% undetermined
  • 29% inside IR35
  • 51% outside IR35

HMRC have stated that the undetermined results are the more complicated cases which would naturally require further reviews or expert advice.

In contrast, determinations carried out through Brookson Group’s SRA regulated law firm resulted in 0% of undetermined results.

Brookson’s audit outcomes:

  • 71% inside IR35
  • 29% outside IR35

Brookson carries out each audit individually, so they can give advice and guidance on what needs to be changed to remain compliant. Expert advice and legal consultancy also allow employers to maximise the number of outside determinations.

How has IR35 changed recruitment?

Brookson’s research has shown that employers found that establishing IR35 status is easier when done prior tor hiring a role, and now often indicate whether a role is inside or outside IR35 on job specs. IR35 status will determine the take home pay, benefits, and perks that the candidate can expect, so listing IR35 status is now recommended as best practice.

What is reasonable care?

Reasonable care requires hirers to take the necessary steps to correctly audit their self-employed workforce.

HMRC have released a lot of employment status manuals to help end users in their IR35 determinations. Number 14 relates to reasonable care and gives advice on what does and doesn’t constitute reasonable care.

Payment options for inside IR35 roles

So, what happens if you have carried out your IR35 audit and you find contractors who are inside IR35? There are several options, says Paul.

  • Agency payroll – an agency doing PAYE for you, for clients on a fixed term contract, or a full-time employee position.
  • Umbrella PAYE – gives contractors the flexibility to move from client to client, while retaining continuity of employment for benefits and pensions etc.
  • Deemed a Ltd Company – contractor gets paid net their limited company, rather than receiving the gross pay. This means no corporation tax is due. But while this is a viable option if you have a lot of different clients, or have investments through your limited company, there aren’t really any benefits to contractors with this option.

Institute of Interim Management IR35 Research

Tony Evans, the co-chair of the Institute of Interim Management, provided some interesting insights on the IR35 changes from the point of view of senior interims.

How have the changes to IR35 impacted Interims?

Initial research from IIM found that 75% of contracts are deemed to be outside IR35, which is encouraging. However, it is concerning that some contracts had yet to be issued with an SDS, despite it being a regulatory requirement.

This might be because HMRC have said that they will take a soft view for the first 12 months of compliance, leading employers to assume that there is no rush to provide interims with their SDS.

However, that doesn’t mean that HMRC will forget the tax obligation.

Where there aren’t SDSs in place, and HMRC challenges an outside decision which is found to be inside, employers will be liable for tax. Any operating interim who hasn’t yet been issued with an SDS should ask for one.

The report also shows that senior interims are mostly continuing to persevere through their usual process of using a limited company, rather than opting for other solutions such as using an umbrella company.

Interim income is seeing a clear impact, with some reporting that they are experiencing a 20% drop in income having been deemed inside IR35.

Interims who are undertaking contracts through a provider should consider the way the provider is operating; how they will support their interims in terms of the net income received, particularly with an inside IR35 determination.

What is the advice for those on contracts without an SDS?

You could argue that the liability is on the end user or client, not the contractor or interim, so there is nothing contractors can do.

But a better approach would be to engage with the client and offer to be involved in the process. The onus is on the client, but interims and contractors should take an active role.

Is it possible for an interim CEO role to be outside IR35?

One of the questions asked by CEST is “Is the role an officer role?” If the answer is yes, then according to CEST you are automatically deemed inside IR35. However, you can also be an interim CEO, but not be a registered officer of the company.

Any determination must balance several factors, which can be quite complex. For example, supervision, direction, and control is a clear feature of determining IR35 status. Most CEOs would argue that they are not being supervised, directed, or controlled, this is particularly true of interims who have been brought in to bring an independent view. This could place them outside IR35.

Are IR35 indemnity clauses lawful?

Clients can put whatever they want in the contract, but that doesn’t make it right. Prior to the changes, IR35 indemnity clauses were common, and there are still some historical contracts around which need to be updated. However, if this is a new contract then we recommend that contractors raise this with clients as it is not in the spirit of the IR35 changes.

How does a senior interim person in a real team (rather than virtual) stay outside IR35?

Interims should look at the overall tests of IR35, rather than just the managerial duties. For example, if they are managing rotas, sick pay, carrying out employee performance reviews or other HR duties, interims will be considered much more integral to the business and be more likely to be inside IR35.

Are overseas interims subject to IR35?

If you’re a UK tax resident working for a UK client then it applies. But if you are living, working, and paying tax abroad then your local tax laws will apply.

With companies that are based wholly overseas with no UK presence then IR35 still applies but it would be considered under chapter 8, which means it’s the contractor’s responsibility.

If the client is overseas but have a UK location or UK presence then IR35 will still apply, but in many cases the contractor would again be responsible for determining IR35 status. In cases such as these, expert advice is recommended.

What if one contractor holds more than role?

Each role must be assessed individually. Some contractors have one role which is inside, and one which is outside. This would be a situation where umbrella solutions can work well for flexibility.

Are some organisations taking a blanket approach to IR35?

A common response in the public sector to the IR35 changes was to enforce a blanket ban on PSE’s and outside contractors.

But the public sector has recently seen a bounce back, with more contractors retuning, due to the resultant skills and labour shortage.

Summary from Tony Evans at the IIM

“The changes to the IR35 have been like a bumpy plane landing, which has been done properly in some areas, but managed less well in others. But the truth remains that you don’t get an option, you simply must do it correctly.

From the interims point of view, it’s important to be compliant, but to do so at a level of income that is in line with our skills and experience.

The changes have caused a huge hit to our incomes, and most people would say this isn’t fair, but that’s the way it is. I’m looking forward to seeing an uptake in the market where the skill sets are increasingly in demand.”

Summary from Tony Evans at the IIM

“I think the public sector has responded worse than the private sector, who have been better prepared. The extra year has helped, but another 12 months would have allowed employers to fully prepare. I still speak to clients who haven’t done anything because they weren’t sure what to do, or because they thought the soft landing would provide them with more leeway. There are still lots of companies who are burying their head in the sand and not doing what they need to.”

Key takeaways

  • It’s much more straightforward to make an IR35 determination at the outset, rather than decide while someone is in the role.
  • Take expert advice if you’re not sure.
  • Get involved; query IR35 indemnity clauses or ask for an SDS if you haven’t yet been given one.
  • The “soft landing” won’t immunise you against tax responsibilities, prepare now.
  • The changes have come as a shock, with the public sector making knee-jerk reactions and banning outside contractors. Others still are needlessly herding people into contracts. But things are now starting to stabilise as people get used to the new legislation.

If you’re not sure what to do about IR35, Eton Bridge Partners and our network can support you with solutions to ensure you remain compliant while achieving your business goals.