IR35 is the tax anti-avoidance legislation that was introduced in 2000 to combat “disguised employment”. The changes are believed to be aimed at organisations who engage with limited company contractors in order to avoid paying employers national insurance and the majority of their workforce is made up of such contractors.
In brief, IR35 contains the set of rules that govern employment status and whether an interim contractor is an employee for tax purposes (inside IR35), where the PAYE tax rules should apply or an independent contractor (outside IR35) which allows more freedom regarding how the contractor is paid and the tax that they pay.
The Government announced in March 2020 that any reforms to off-payroll working rules have been delayed by 12 months as part of the government’s Covid-19 economic response package. More information to follow in 2021.
Eton Bridge Partners hosted a webinar with IR35 specialists, Brookson Legal. This discussion was focused on IR35 and featured a review of the changes, as well as a Q&A around the reforms that are due to come into effect in April 2021. There were a number of questions raised throughout the webinar and we have published a full list of these and the responses. Please followthis linkto read your FAQs and you can watch the full discussion here.
IR35 ADVICE FOR CLIENTS
What is changing?
The IR35 rules and tests themselves are not changing, but simply who holds responsibility for determining an interim contractor’s status. The responsibility is currently with the interim contractor but from 2021, it will fall to the end client (the hiring manager).
If the interim contractor is deemed to be working inside IR35 for an assignment, then we will have a statutory duty to ensure that tax & national insurance (both employers and employees) plus apprenticeship levy are applied to their payments which will affect the cost of those contractors. The contractor will have the option to engage with an umbrella company or continue to work through their limited company under the “off-payroll” rules. Whether the contractor chooses to be paid “off-payroll” or via an umbrella company, there are likely to be additional charges invoiced each month to cover the employers NICs and apprenticeship levy.
How will this affect you?
Moving forward, we will need a “Status Determination Statement” (SDS) for all interim contract assignments that we support you with. In simple terms that means that you will need to tell us if the assignment falls inside or outside the scope of IR35.
We are working closely with Brookson Legal, the leading IR35 specialists in the UK and so Eton Bridge Partners can offer each hiring manager support in the determination of whether a role should sit inside or outside IR35. In addition, if you would like further assurance, Brookson Legal are able to carry out the assessment for you for a small fixed fee. As long as it can be proven that reasonable care and consideration has been taken during the determination process, there is unlikely to be any comeback from HMRC.
It is also important to note that an interim contractor is able to challenge the determination and so simply labelling all interim contractors as inside or outside IR35 is not exercising reasonable care.
What did we learn last year?
Last year, for our own internal forecasting purposes, Brookson Legal reviewed all of our interim contract assignments and the vast majority were deemed to be outside the scope of IR35.
It is a common misconception that if one test is failed, the assignment will be Inside IR35 which is NOT the case.
Our biggest challenge came from a lack of detailed understanding of the legislation amongst our clients and their internal compliance teams. This, along with the logistical challenges for those with large numbers of contractors, lead to them taking a blanket approach or what they thought was a prudent approach which resulted in them reaching incorrect determinations. Neither of these approaches are taking “reasonable care” which is a requirement of the legislation.
The majority of our assignments are likely to be Outside the legislation due to Mutuality of Obligation – the contractor is not obliged to offer any services outside their schedule of deliverables. Equally, the client is not obliged to offer work to the contractor.
Using an expert, such as Brookson Legal, to assess just one assignment will provide the client and their compliance teams with useful insight in to legislation and how to assess an assignment in the future. The cost of £250 (or £150 if they assess more than 4 assignments) is insignificant compared to the additional employment costs that will be attached to an assignment if it is incorrectly determined as Inside.
What do you need to consider in making the determination?
The key tests involve assessing the areas of substitution, control and mutuality of obligation. Please note that ALL 3 of these tests need to be satisfied for the assignment to fall inside IR35. In other words, the answer to one or more questions in ALL of the categories needs to be “no” for the assignment to fall inside.
There are a number of online tests available, including the CEST tool provided by HMRC however they are not totally reliable, and some give an “inside” determination if only one test is failed. Please also note that if the contractor is an Office Holder (Director) registered at Companies House then they will automatically be inside IR35.
The main tests are:
Would the contractor be permitted to supply an alternative individual on behalf of their limited company to provide the services?
Has the contractor ever exercised their right to provide a substitute?
Can the contractor decide where they work from day-to-day?
Does the contractor have the freedom to decide when they work?
Does the contractor work without direct supervision?
Can the contractor decide how to do the work without their method having to be checked by the client?
Mutuality of Obligation (MOO)
Is the contractor working towards pre-defined deliverables or on a specific scope of work?
Is the contractor free to refuse tasks which arise and fall outside the scope of the agreed contract? Similarly, can they refuse future assignments?
We see this change as a positive move as it will ensure that all interims coming into your organisation will have clear objectives that will be defined at the outset. Going forwards we will work with you to ensure that there is clarity at the start of an engagement as to how an interim contractor will be used and ensure that the contract reflects the agreed deliverables which will only strengthen the value proposition of Eton Bridge Partners.
What do I need to do now?
If we are currently supplying interim contractors to your organisation, we will be in touch shortly to obtain your Employment Status Determination for each assignment. If you need expert advice on this please contact Brookson Legal and they will be able to do the assessment for you for a small fee (£250 per assessment for up to 4 assessments and £150 for more than 4). This would provide you with valuable knowledge to enable you to carry out your own assessments in the future.
What do I need to do now?
Once we know the status of the assignment, we will discuss the payment options with the interim contractor. If the contractor had previously determined the assignment differently then the rates may need to be amended to include the additional “employment” costs.
If the assignment is deemed Inside IR35, employers NIC (13.8%) and apprenticeship levy (0.5%) need to be applied to the contractors pay rate and paid to HMRC for every day worked.
Please rest assured that we will help guide you through these changes and will work closely with you and the interim contractors to minimise any impact.
The IR35 rules themselves are not changing, but simply who holds responsibility for determining an interim contractor’s status. The responsibility is currently with you, the interim contractor, however from 2021, it will fall to the end client (the hiring manager).
How will this affect you?
If the assignment is deemed to be inside IR35 then we will have a statutory duty to ensure that PAYE and NICs are applied to all payments relating to that assignment. This could be through an umbrella company or by us deducting PAYE & NICs from your invoice before it is paid. The client will also incur additional statutory costs for your services.
What are Eton Bridge Partners doing to prepare for these changes?
We are working closely with Brookson Legal, the leading IR35 specialist law firm in the UK, to guide you through these changes.
Last year they assessed all of our assignments and only a very small number were found to be Inside IR35. In many cases this was due to the “mutuality of obligation” (MOO) test which looks at whether you are obliged to provide services outside your agreed scope of work or agreed deliverables. If you are not then it is unlikely your assignment will be Inside IR35.
We are working hard to ensure that our clients have all of the information required to make an accurate assessment. They do have a duty to take “reasonable care” in making their assessment and you do have the option to challenge their decision if you have good reason to believe it is inaccurate or you have additional information which should be taken into account.
The key tests involve assessing the areas of substitution, control and mutuality of obligation. Please note that ALL 3 of these tests need to be satisfied for the assignment to fall Inside IR35. In other words, the answer to one or more questions in ALL of the categories needs to be “no” for the assignment to fall inside.
There are a number of online tests available, including the CEST tool provided by HMRC however they are not totally reliable, and some give an “inside” determination if only one test is failed. Please also note that if you are an Office Holder (Director) registered at Companies House then you will automatically be inside IR35.
These are the areas to consider with the three main IR35 tests:
Are you permitted to supply an alternative individual on behalf of your limited company to provide the services?
Have you ever exercised your right to provide a substitute?
Can you decide where you work from day-to-day?
Do you have the freedom to decide when you work?
Do you work without direct supervision?
Can you decide how to do the work without your method having to be checked by the client?
Mutuality of Obligation (MOO)
Are you working towards pre-defined deliverables or on a specific scope of work?
Are you free to refuse tasks which arise and fall outside the scope of your agreed contract? Similarly, can you refuse future assignments?
It is important to note that there are other factors that can be considered, but the above 3 are the most significant.
How can I prepare for the changes?
Most of the work involved in these changes will fall to the client. However it may be useful to share your own assessment of your assignment with your line manager. In our preparation last year (before the changes were postponed) we found there was a lack of detailed knowledge of the legislation within our clients and their compliance teams. This is quite a specialist area and so requires expert advisors to get it right.
If you are unsure how to carry out the assessment or would like some guidance please get in touch. If your situation is complex we may advise asking Brookson Legal to perform the assessment. They will charge a small fee (£250) however this is insignificant compared to the additional tax & national insurance costs you could incur resulting from an incorrect “Inside” determination.
What will happen next?
We will write to you individually in due course if your assignment will be affected by the changes.
If your current assignment falls outside IR35, no further action needs to be taken.
If, however, your assignment falls inside IR35, you will have the option of being paid through an umbrella company or continuing through your limited company under the “off payroll” rules, whereby PAYE deductions will have to be made from your invoices. In addition, the charge rate for your services will need to increase to cover the “employment” costs of employers NICs and apprenticeship levy. We will provide more details on the options available to you nearer the time.
If at any time you have any queries relating to your status, please inform your Eton Bridge Partners consultant in the first instance and we will help facilitate a discussion with the client.
Help is on hand
Please rest assured that the team at Eton Bridge Partners will be on hand to support you through these changes. If you have any questions please email firstname.lastname@example.org we will respond as quickly as we can.