Is your business IR35 ready?

The changes to the IR35 rules in the private sector are causing concerns for medium and large-sized businesses across the UK. From April 6, 2020, these organisations will be responsible for determining whether a contractor is inside or outside IR35. If an HMRC investigation results in any penalties, it is the fee-paying client that will be liable for back taxes, National Insurance contributions, interest and late payment fees.

Businesses are now reviewing their contractor workforce plans, hiring practices, payroll processes, and relationships with recruitment agencies in order to ensure they are compliant with the legislation when the changes get rolled out.

Do the IR35 changes apply to my business?

This change applies only to medium and large-sized businesses. This includes any company that meet two of the three following conditions for the last two consecutive financial years:

  1. Over £10.2 million revenue
  2. Over 50 employees
  3. Over £5.2 million on the balance sheet

Even then, a business only legally gets classified as new size at the beginning of the next government fiscal year (the following April).

Who is liable?

In situations where a contractor is deemed to have been incorrectly placed outside IR35, the liability sits with the organisation that pays the contractor (i.e. the client or the recruitment agency). There are situations where this liability passes to the client e.g. if a determination hasn’t been made or hasn’t passed down the supply chain, or the fee payer is unable to pay. By using a reputable and diligent recruitment agency with a strong financial record, these risks are minimised.

What does inside or outside of IR35 mean?

Inside IR35 –The contractor is considered, for tax purposes, to be an employee of the client due to the nature of their role written in the contract and in practice.

Outside IR35 – The contractor is considered to be a legitimate independent business providing a product/service for a client due to the nature of their role written in the contract and in practice.

Are my contractors inside or outside of IR35?

It all depends on the relationship between the contractor and your business, as laid out in the contract and working practices. A few key factors that should be considered:

  • Direction and control: Does the contractor have the authority over the work they do as well as how, when, and where they do it?
  • Substitution: Is the contractor able to hire someone to do their work for them / provide them with substantial help with the work?
  • Mutuality of obligation: Is the client free to not provide the contractor with continuous work once the contract has ended and, if they do, is the contractor free to decline further work from the client?
  • Financial risk: Is the contractor required to rectify defective work at their own cost? Do they have their own insurances?

If the answer to the questions above is ‘yes’, then the contractor may be considered outside of IR35.

If any of the answers to the questions above is ‘no’, then the contractor is inside IR35 rules and will be taxed on their earnings through the normal employee PAYE scheme.

How can my businesses remain compliant?

In order to remain compliant with IR35, based on the draft legislation, from 6 April 2020 your businesses will need to:

  1. Provide the contractor and the recruitment agency (where applicable) with an IR35 status determination statement.
  2. Demonstrate reasonable care when making the status determination, including considering the key factors discussed above.
  3. Respond to any disagreement (with reasons) made by the contractor or the agency (where applicable) within 45 days.
  4. Notify the contractor or the agency (where applicable) of the business’s change to a small business (as the new rules will not apply to them at that point).

We can help

We have worked with clients in the public sector who have already been affected by the rules under IR35 since 2017. These clients include HMRC, Home Office, Ministry of Defence and police forces, and we currently provide support to our candidates and clients regarding the new changes.

We can:

  • Manage contractor communication and dispute resolution on your behalf.
  • Guarantee that your legal requirement to have used ‘best endeavours’ to arrive at the determination has been met.
  • Manage the determination review process on your behalf, providing a single, simple questionnaire to the relevant person within your organisation.
  • Indemnify you against all costs, fees, penalties and liabilities arising from any challenge relating to the determination or the subsequent engagement.

Learn more on:

IR35 changes impacting private sector companies & contractors

IR35: Why you should review your working practices

Contractor Payroll Services  SAP, Oracle, IT recruitment

IR35: Why you should review your working practices

The controversy around IR35 continues to affect a number of industries, but the complexity of this regulation has created particular confusion in the IT sector, with a number of cases taken to the high courts. Some suggest it is the nature of the providing IT consultancy that brings HMRC’s attention, whilst others suggest that the guide provided by HMRC is exactly just that, a guide rather than a set of rules, meaning that some of the required criteria tends to have more weight than others depending on each case.

IR35 cases

The first appeal against HMRC in regards to IR35 took place in 2001, just over a year after the law was first introduced. Known as Battersby vs Campbell, the case involved an IT consultant who worked for a bank for seven years through his limited company, first under a six month contract and then under a number of 12 month contracts. Mr Battersby eventually started reporting to a manager and had other people working underneath who were hired directly by the bank.  The consultant was also paid by the hour, used the company’s equipment and had to request permission for any absences. At this point in 2001, he was offered a permanent position which he accepted. HMRC determined therefore that the income from the previous six months should classify as earnings rather than dividends. It sounds an easy case and an obvious one for someone with knowledge on IR35 implications, however, there is also another side to the story: Mr Battersby had no rights to sick pay, private healthcare or holiday pay prior to becoming a permanent employee, he had to renew his contract year after year and was paying £1000 in accountancy fees per year to manage his own book keeping all of which are basic criteria to fall outside of scope of IR35. The consultant also asserted that it is common in the IT industry to hire freelancing contractors because they can be laid off without severance pay. This was unfortunately not enough for the courts and HMRC won the case.

There has been other cases ruled in HMRC’s favour since, such as the famous case of Dragonfly Consultancy in 2007, in which consultant Jon Bessel was left with a bill of £100,000 in taxes after the high court dismissed his appeal on the grounds that he had become part and parcel of the AA – the organisation he was working for at the time – due to being considered a team member and having a manager to report to, despite having a contract with a right to substitution and paying for his own equipment and training.

It seems however, that over time, contractors and companies have come to terms with this law. From 2009 to 2018 courts have been ruling in favour of IT consultants, consistently finding that they are genuine contractors.

HMRC targets TV personalities

It was only last year that the High Court finally ruled in HMRC’s favour. The failed appeal of journalist and broadcaster Christa Ackroyd is the last recorded case won by HMRC. Mrs Ackroyd was requested to pay over £400,000 in taxes following a suggestion from the BBC that she create a limited company to avoid BBC’s liability of PAYE and NI taxes, despite the fact she had a seven year fixed contract. The court emphasized Mrs Ackroyd had done nothing wrong and the BBC eventually apologised for having encouraged these practices but the taxes still needed to be paid.

More recently, TV presenter Lorraine Kelly has won her case against HMRC after proving she is not an employee of ITV but rather an entertainer who performs the role of a friendly and charismatic person for their shows. Mrs Kelly was also able to prove she was not receiving sick pay or any other benefits from ITV.

When it comes to IT consultants, all cases taken to court have been ruled in their favour meaning IT consultants have continued to prove to HMRC they are genuine contractors. ECR Consulting, MBF Design Services and Jensal Software are amongst this list. It is important to highlight that IR35 was created with the purpose of stopping “disguised employees” from avoiding paying tax and National Insurance, but also to avoid inequality in the rights between two people performing the same job, therefore the most important thing to do is to ensure that your contract and your working practices are aligned.

Contractor Payroll Services 

IR35 enquiry letters

As a contractor, you might receive a letter titled “Check of employer records” at some point. This is an IR35 enquiry letter that HMRC sends out to contractors. You will recognise it because it will ask you to provide a breakdown of the income reported in your limited company accounts and a copy of the contracts that resulted in that income. The letter will also request clarification on whether you believe IR35 applies to your company or not and why. This letter is an opportunity to explain your working practices and provide supporting contracts to demonstrate that IR35 does not apply to your services. You may also have to attend to a face to face meeting to provide further information. Should HMRC be happy with the information provided, the investigation will be closed.

How can I prepare for an IR35 enquiry letter?

  • Have a look at the IR35 guidelines
  • Think about all your previous and current contracts and the relationship you hold with your clients
  • Have your contracts reviewed by your accountant and/or an IR35 specialist
  • Request the reviewers to put their opinion in writing
  • Prepare with preventative IR35 investigation insurance or legal cover
  • Ensure your working practices adhere to your contract

Why do I need to review my contracts?

The main reason to be prepared is to be able to prove you are not a “disguised employee”. There have been cases such as the ones mentioned above, in which either the contract or the working practices do not reflect a relationship between a client and a contractor, but rather that of a company and an employee. You should therefore ensure that your contract, whether it has been signed directly with a client or via an agency is clear about your relationship with the end client.

What your contract should look like

To reduce the risk of falling inside IR35, we recommend ensuring the following is included in contracts:

  • The contractor provides independent services and is not under the supervision, direction and control of the client.
  • The contractor has a genuine unfettered right of substitution.
  • The contractor is responsible for the delivery of the services and controls how and when they undertake the services, as long as they meet client specific targets or completion dates.
  • The contractor is seen to have a financial risk, i.e. are responsible for making good any defective work and maintaining appropriate insurances.
  • The contractor provides the main tools, equipment and materials required to perform the services (except where the hirer has a business-critical requirement for the contractor to utilise equipment, i.e. for security, data protection or safety).

More importantly, contractors should always ensure that the working practices mirror the contract. If a contractor has similar working conditions, responsibilities and control as a client employee, they are more likely to be caught inside IR35, regardless of what the contract says.

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Learn more about IR35 and the new changes taking place in 2020 :

Is your business IR35 ready?

Am I a PAYE or an off-payroll contractor?

IR35 changes impacting private sector companies & contractors

It has recently been announced by HMRC that the Intermediary Legislation, commonly referred to as IR35, will be subject to further reforms. The IR35 law, which is part of the Finance Act, was first introduced in April 2000 with the purpose of stopping “disguised employees” from avoiding paying tax and National Insurance, but also to avoid inequality in the rights between two people performing the same job.

What is a “disguised employee”?

The term refers to one-person limited companies who work for a client on the basis of an off-payroll contract but whose working hour’s pattern, rights and obligations, day to day tasks and work relationships are the same as formal employees.

The main reasons why this legislation does not allow one-person limited companies with this characteristics to be off-payroll are:

  • One-person limited companies can reduce their declared annual profits by taking travel, equipment, training (and more) expenses into account. Employees are not able to do this and, if paid the same, would be paying vastly different amounts in tax.
  • Disguised employees are paid through dividends via their limited company rather than through payroll. Dividends are taxed at a lower rate than if an individual was receiving this money through payroll.
  • National Insurance is not applicable to dividends, which means the “disguised employee” could be avoiding paying NI, which would be paid if they were an employee.
  • Companies who engage with Intermediaries off-payroll do not pay Employers NI, auto-enrolment Pension contributions or Apprentice Levy on the monies they pay to the Intermediary.

What are the new changes to IR35?

The intermediary legislation is being reformed to state that from April 2020, contractors or consultants who work under one-person limited companies (PSC’s) for medium and large companies in the private sector will no longer decide whether a working contract is inside or outside of the IR35 legislation. Instead, the client who supplies the contract is the one who will determine the category the contractor will be working under, and therefore will be also responsible for paying fines if it is discovered they have been negligent in their duty to do so.  The practice of getting clients to identify the contractor’s status is not new, as it was first applied to the public sector in 2017. The main change is that it will be now also be applicable to medium and large businesses in the private sector.

Why are the changes to IR35 controversial?

The benefits for contractors is that, in some cases, liability associated with an incorrect determination might not sit exclusively with them, and also that some companies might give contractors a more aligned and defined contract, including working practices that reflect the independent services the contractor is to deliver that benefits them by having the freedom that a contractor or freelancer should have – in terms of set working hours, requirement to be on site, company uniform in some cases, reporting lines and various other flexibilities that help demonstrate an independent contractor is in no way a deemed employee.

On the downside, risk-adverse companies might try to avoid getting fined by simply classifying all contractors as employees even if it is means both the employer and the contractor would be required to pay higher tax and NI and it might not be an accurate reflection of the relationship between the two parties. Those inside IR35 would need to be engaged under an ‘employed model’, with PAYE via an umbrella company or agency, which means restructuring their admin operations and as a knock-on effect, the fees incurred from weekly/monthly payments via an Umbrella might be higher than those incurred by annual accounting costs of a PSC, pushing up the cost of contract recruitment further.

Contractor Payroll Services 

Am I a PAYE or an off-payroll contractor?

Whilst the responsibility will now lie on the client to make the determination, if you are a contractor, it is important that you are able to identify what type of contract you are working on. Here are some examples on how to identify your contract status.

You are likely to be a PAYE if:

  • You need to ask your employer to take time off.
  • Your employer decides when and where you work.
  • You are expected to “busy yourself” if the workload of the project is low.
  • Your employer can move you to a variety of tasks.
  • You are unable to refuse work.

You are likely to be an off-payroll contractor if:

  • You can be substituted by another contractor.
  • You are allowed to finish a contract in less time that originally agreed if the work has been completed.
  • You work for different employers.
  • You spent at least £1200 per year in advertising.
  • You own or rent premises outside of your home.

You can use the HMRC determination tool to find out your employment status. Naturally, your current situation might be a mix of the above guidelines, therefore we recommend contacting an IR35 expert if you are in doubt.

To read about IR35 case studies visit IR35: Why you should review your working practices

How can I prove I am a genuine contractor?

There have been recent cases in which contractors do not agree with the category they have been put under and have challenged HMRC in court after proving they are a genuine off-payroll contractor.

The best practice is to align your working practices and your contract terms. We already mentioned the importance of the pattern in your working hours and the work location. Here are some additional suggestions:

  • Ensure your contract mentions a clause about substitution.
  • Bring to work your own equipment and make sure you use it.
  • Request to be allowed to work from home sometimes when pertinent, to enable your e-mail to record you are working from home.
  • Pay your own expenses and keep receipts.

You can find more information here on the summary of responses from HMRC and HM Treasury in regards to off-payroll working in the private sector. The UK government website should also be updated in due time, therefore ensure you keep yourself informed on the updates and changes.

Are you a medium or large size business? Read Is your business IR35 ready?

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