In the run up to the change in the legislation Eton Bridge Partners’ 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 would impact those affected.
Following this session, we had several follow up questions which have been answered below.
In anticipation of the changes to the legislation which were scheduled for April 2020 but were then postponed until April 2021 we pulled together videos and content with advice for clients and our interim network. Whilst things have moved on since these short videos were produced in 2019 they may still provide some useful content.
IR35 advice for clients
What has changed?
The IR35 rules and tests themselves are not changing, but simply who holds responsibility for determining an interim contractor’s status. Historically the responsibility fell to the interim contractor but from April 2021, the end client (the hiring manager) became responsible.
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 the 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 will be additional charges invoiced each month to cover the employer’s NICs and apprenticeship levy.
How will this affect you?
We now require 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 have worked closely with Brookson Legal, the leading IR35 specialist 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 have we learned?
Since the legislation was introduced in April 2021 the vast majority of our contractors have been 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 regarding incorrect determinations often comes from a lack of detailed understanding of the legislation amongst our clients and their internal compliance teams or being risk adverse and taking a blanket approach by determining all assignments Inside IR35 Neither of these approaches are taking “reasonable care” which is a requirement of the legislation.
The majority of our assignments are 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 are 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?
Once we know the status of the assignment, we will discuss the payment options with yourself and the interim contractor.
If the assignment is deemed Inside IR35, employers NIC (15.05%) and apprenticeship levy (0.5%) need to be applied to the contractor’s pay rate and paid to HMRC for every day worked.
Please be rest assured that we will help guide you through the process.
If you have any questions regarding this, please email [email protected] and we will come back to you as quickly as we can.
IR35 advice for candidates
What has changed?
The IR35 rules themselves did not change, but simply who holds responsibility for determining an interim contractor’s status. Historically the responsibility was with you, the interim contractor, however from April 2021, it has fallen to the end client (the hiring manager).
How does 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.
How did Eton Bridge Partners prepare for the change in legislation?
We worked closely with Brookson Legal, the leading IR35 specialist law firm in the UK.
Prior to the legislation changing 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.
How do clients assess the role?
Clients 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.
What do I need to do now?
If your assignment falls outside IR35, no further action needs to be taken and we will make a full payment from your invoice to your limited company.
If your assignment falls inside IR35, you will have the option of being paid through an umbrella company or working through your limited company under the “off-payroll” rules, whereby PAYE deductions will have to be made from your invoices. All you need to do is advise us of your preferred payment option.
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. If you have any questions please email [email protected] and we will respond as quickly as we can.
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