Frequently Asked Questions regarding IR35

Following our webinar with IR35 expert, Paul Lloyd from Brookson Legal, we’ve answered your questions regarding IR35.

If you’d like to watch the discussion in full, then there’s a link to the webinar here.

Having been given a second chance at getting this right what are the key learnings for both clients and candidates from the 1st time?     

Education – People need to take the time to understand it. It isn’t going away this year, so it needs to be properly understood to mitigate financial risk but also the risk of losing talent.

My understanding is that “control” is a key test. Is it harder to argue this now that most people are working from home?    

This could be argued both ways. Clients now have less control of people due to COVID, but equally, they have a less control over the employees too. It will be interesting to see how this is seen.

Is it correct that all 3 of the main tests need to be failed for a role to fall inside IR35?  

No. The determination is on balance. The three tests – Control, Substitution and MOO (Mutuality of Obligation) are the trilogy of tests and hold the most weight.

Substitution – Always a slightly confusing area – How is it best to tackle this?    

Most PSCs will never use a substitute. This is more likely to be acceptable in a SOW arrangement

Do SoWs provide a compliant way of operating outside IR35?

If structured correctly, yes. The liability is passed to the fee payer, so the end client will not have any liability.

What is the most efficient way to operate an inside IR35 contract from an interim perspective?

It really depends. I would suggest that people get in touch to discuss their personal circumstances so that we can provide the most appropriate advice.

What should our clients be doing now in advance of April to ensure continuity of the workforce and a smooth transition?      

They need to be actioning this early and changing their processes to accommodate the change. A lot of organisations are unaware of the number of contractors in their business, so it is important to start a process now if they haven’t already.

Surely a lot of the tests are subjective, are HMRC going to look in detail at Status Determination Status?    

They are unlikely to be looking at individual SDS forms. However, if an organisation raises suspicion, an audit is likely to be undertaken.

Is the CEST tool now providing accurate assessments in your opinion?  

It is unable to provide a determination more often than not. It is not a reliable tool for those roles which are slightly grey.

Is CEST taking all three tests into consideration now?    

It still doesn’t take MOO into consideration. It is not deemed to be a particularly reliable tool still.

Have any changes been made since last year?

No, the legislation remains the same as it did when it was due to come in April 2020.

There was talk of a “soft landing” last year. Will this be the case again?

There will be, although it hasn’t been made clear exactly what this means.

There was lots of speculation the first time that blanket determinations couldn’t and shouldn’t be done and they were actually in breach of the guidelines, could you perhaps clarify the current position on that, please?     

This is correct. It is illegal to place all interims inside IR35. Organisations are getting around this by altering the wording that they use.

Are HMRC going to look retrospectively at IR35 determinations or is there now a clean slate?

HMRC have said that they will not look retrospectively. They only have a small team operating in this space, so they are more likely to go after the corporates than the LTD company.

Can I ask if HRMC is intending to look back over the last 10yrs or less at limited companies working as contractors in the private sector?

They can look back up to 6 years regarding IR35 but they have openly stated they won’t be using these changes to go after interims. They do have the power to though, so it is worth bearing that in mind and ensuring you get a new contract if your role moves to an inside of IR35 position from outside.

Is it too optimistic to hope that IR35 legislation gets pushed another year in view of C-19 disruptions and priorities?

Yes this is unlikely to happen again and the legislation has been passed into law so has gone further than last time already

I’ve been greatly amused by contracts advertised as being outside IR35 until April 2021…  Any comments?   

Yes, this is pointless, as it is your responsibility and risk as a contractor until 6th April 2021

Is the HMRC’s starting point that all assignments are inside IR35 unless proven and documented to be outside?   

That is their stance, but it isn’t correct under legislation or case law. They need to prove there is an employment relationship

What are the main reasons for HMRC losing the tribunals they bring?   

There are lots of reasons. Many are due to MOO (mutuality of Obligation) and control, where they have interpreted the legislation differently to case law

Do we know how much HRMC spends on all tribunals? Is their opex taken into the costs they are currently recouping?

No, not known and they only factor in extra tax, not the cost of rates increases, project delays or investigation costs

Do you foresee problems where the end client and the recruitment firm, say Eton Bridge, have a different view on the determination?

I think this is unlikely and the is the purpose of the 45-day challenge process where the contractor/agency can challenge if they feel necessary. The client’s view is most likely to override the agency view as they have the responsibility in the legislation

Do existing contractors have the right to appeal on the SDS determination? 

Yes, there is a 45-day challenge process that your client will need to answer

After 6th April 2021, do I need an SDS from the client for any assignment?  

Yes, that is correct

If an assessment was completed this year and an “outside IR35” determination was confirmed – will this still stand? Or will the assessment need to be carried out again?

It should be carried out again. We would recommend re-reviews every 6-9 months to ensure the client is still taking reasonable care and working practices haven’t changed

I recently completed an SDS process with a large plc. The reality was that the corporate HR and corporate tax managers were risk-averse and assessed almost everyone as “within IR35” even though I could demonstrate I was truly a contractor. I challenged but the plc simply said “appeal to HMRC”.  What is your advice in such circumstances?

The client needs to answer the challenge, and this is the purpose of the 45-day challenge process. HMRC wouldn’t help with this unfortunately

Can you please clarify more about the meaning of ‘In business on own account’ – a header on other factors to test if it falls into IR35?      

This relates to whether you have your own equipment, pay for your own vehicle, have insurances or have a financial risk for rectifying issues. Also working for multiple clients may be considered

My experience is that clients are very risk-averse and therefore unlikely to find anything other than ‘inside’ IR35… Does that reflect what you are seeing?      

No, we are engaged with 100’s of clients and average 68% of all reviews as outside of IR35. The client needs to engage in doing full reviews

The implication of IR35 means that if they are inside this will result in the company increasing their headcount numbers as it is equivalent to an FTE Correct? If so this is a major risk as companies at the moment are reviewing very closely their headcount numbers.  

Yes, I agree and why businesses need to review properly for IR35. Flexible workers are needed more than ever now

How long does the risk of investigation by HMRC last post the completion of a contract?     

They can investigate back up to 6 years

What are the answers to be outside of IR35?   

There is not an “answer” as such but remaining as independent as possible will increase the chances of remaining outside IR35. A full and proper assessment is the only way to truly determine a role’s status.

If you’re managing a team, I think this is automatically inside IR35 too?

It is higher risk but not definitely inside of IR35 – this would need careful legal advice

What about Team Management and operating ‘outside’?

This is still possible, but it makes it more challenging. As mentioned earlier, the determination is “on balance” so a more thorough review would likely be required.

Would it help avoid being inside IR35 if I team up with another similar interim and therefore can offer a “substitution” element?    

No, unlikely to help unless your client agrees as they make the determination

How much does working against an SOW help to ensure a role is outside IR35?   

I think you mean through an SOW. It helps as project-based but the SOW provider becomes the client and needs to make the determination

Are maternity cover roles automatically inside?    

Mainly they are but you can work to get them outside if the role is significantly different

Am I right in saying that if I am an Office Holder, I am automatically deemed inside? 

This is correct.

Even if the role is a BAU role, how / why could it still sit outside?

The determination is “on balance”. It depends on a number of factors as to whether a role is inside or outside IR35.

I have determined myself to be outside IR35 currently, but my client has said they have deemed my role to be inside from 6th April. Is there anything that I can do to stop this? Should I be concerned that it will raise a red flag?   

You have 45 days to appeal a decision. 68% of roles that we review fall outside, so it may be that your client needs more education around how different working practices impact a decision.

Does IR35 apply to an overseas company not registered in the UK using a UK contractor?   

No, responsibility and liability remain with the contractor. But if the Overseas company is a UK Tax Resident or has a premise over here, liability can transfer to the UK Entity

Is there any difference for contractors working remotely outside the UK? 

It depends on your tax residence. If you are a UK tax resident, then it still applies

If I have a foreign assignment but must WFH can HMRC conclude IR35 is enforceable and push the liability to the candidate?      

Depends on who you are working for, if a UK entity then yes, the rules apply

I run a small business. If I use a contractor to deliver a service to a large client, are they covered by the Small Company Exemption because my company is paying their fee, or does the SCE not come into play because the end client is a large company?     

It depends on the contract and working practices. If you are supplying a worker on time & materials, then they are the client and it applies. If it is an SOW or project contract where you outsource the whole project, then you are the client and the exemption will apply

If I am working for a large corporate through an intermediate consultancy that would be classified as a ‘small company’, can they still pay me gross to my PSC?  

As long as it is a true SOW or Project contract – It depends on the contract and working practices. If you are supplying a worker on time & materials, then they are the client and it applies. If it is an SOW or project contract where you outsource the whole project then you are the client and the exemption will apply

My business has seasonal workers where the contractors submit timesheets & invoice monthly – we often don’t know how long the work will last – and it can end very unexpectedly – close protection and guarding. Should we move to fixed-term contracts?       

No, ideally you would assess the roles, so you know which are inside and outside. Simply moving to FTC will increase your costs and reduce contractors take-home pay

My interim work usually means an 18month to 24month commission restructuring a part of a business, the work is always a project and has defined objectives. If I interpret your slides correctly, I would fall within IR35?   

No, you would need your role to be fully assessed. The length puts you more at risk but doesn’t mean you are inside

I have a query regarding recruiting people who are limited companies on successive contracts, whether that’s ok if there’s a certain break required between contracts

Ideally, you would have separate contracts for each project rather than simply extending or rolling the contract.

If taking an interim role for a finite period of time i.e. deployment of a new system – does the very nature of the short-term requirement with a specific scope mean IR35 doesn’t apply?  

No, unfortunately not, you could work 1 day and be inside IR35. The role, contract and working practices still need assessing

Does the legislation apply to charities? 

Yes, all sectors are included now. The only exemption is for a small business under the companies act 2006.

Is there a risk if HR/Talent are involved in the recruitment that the hire is seen more as an employee rather than as a contractor?

Only if the HR/Talent team don’t understand IR35 sufficiently. They need to ensure they are educated on the risks of putting people inside IR35 and the cost implication.

We anticipate being able to file small company accounts for y/e 31.12.20 and 31.12.21 but will file full company accounts from y/e 31.12.22. When would the new rules apply to us?      

It applies from the start of the following tax year, so April 2023

Does being paid on output significantly improve your definition of being outside… e.g. paid on set deliverables that are not weekly, monthly etc.

Yes, this is more akin to project work and is stronger however if this is contrived and it is just rate x days = project payment HMRC will ignore that and still investigate fully

If the company is fined or has tax & NI accessed would they be able to go after the contractor to recover?

No – there is no liability on the contractor

What are the fines and penalties for not complying?    

Unpaid Tax, NIC plus unlimited fines, penalties, and interest

What are the implications for output VAT? does the PSC still charge it for fees on assignments inside IR35?

It depends on how you get paid. If via an umbrella company then you won’t be using your Ltd company. If you get paid Net to your Ltd company then yes you would still charge VAT and be responsible for returns

Has HMRC ever said what the additional tax take was from implementation in the public sector?

Approximately £600 million per year. They are budgeting for £1.3Bil in the Private Sector

In their estimates of increased tax take, does HMRC take account of the consequential reductions in corporation tax and VAT?

No, they didn’t.

Listening to Paul ref rate reductions re being inside IR35 – £3240 to £2163 based on £800 per day, does this also include the effect of not being able to claim expenses, put a pension contribution through your own limited company – so effectively, further reducing the net take-home pay given increased personal costs?   

Yes, these factors in estimated take-home are based on assumptions around expenses, etc. Salary sacrifice pensions can be offered through the Brookson Umbrella solution

Can the deducted Income Tax & EE NI deducted at source under IR35 be offset against limited company’s CT charge (treat as a tax-deductible cost) or other?

No, the entity paying you has to deduct the tax before paying you if inside IR35

If I fall within IR35 under the new regs, can I still get expenses deducted from my gross ‘salary’ – appreciate the ability to claim T&S is very restricted, but what about being able to offset items that an employer would usually pay for (and is not a BiK), e.g. conferences, subscriptions, training, life insurance etc.

No, expenses cannot be claimed. Only fully client reimbursable costs would be allowable

Is it ok for companies to include a contract clause that indemnifies them from liability for income tax, national insurance, etc.?

No, HMRC will look to the client/fee payer for any unpaid tax

What is the impact on take-home pay for someone who may be moving from outside IR35 to inside?

For those operating in the high rate tax bracket, it is about 33%.

Has HMRC determined any penalty or fee structure for getting determinations wrong?    

Not beyond saying it will be tax and NICs due plus fines, penalties, and interest.

I’m concern that HMRC will change their mind and investigate the past – they have a history of changing minds – Loan charge, IR35 not going to be added to private sector, etc. Does/can Brookson offer insurance against such a back-dating claim?    

No, this is very difficult to insure against unless you have been having reviews previously for your work where you are liable. The providers of TLI also have a probability of success clause so my personal view is they are a waste of money. They also insure against the investigation specifically not the overall tax loss

Do you recommend any umbrella companies, used by yourselves?  

Brookson has their own Umbrella solution (Brookson Solutions). UK tax paid and FCSA accredited – ensure you do your compliance checks as risk of offshore schemes is with you if you get this wrong

Can PAYE umbrella workers get expenses if found to be inside IR35? 

Unlikely, if you have failed IR35 then you are likely to fail the SDC test for expenses

Nick Berman

Partner
Consulting


Nick leads the consulting practice within Eton Bridge Partners. Having supported a number of clients over the last few years through significant transformation programmes, Nick now provides consulting services through our trusted associate network.