IR35 FAQ
The forthcoming off-payroll changes to the private sector will present many challenges to the UK contracting industry – it is now time to start preparing!
We partnered with IR35 experts, Kingsbridge, and hosting an IT Contractor Q&A event to help you prepare for the legislative changes in April 2021.
The FAQ below is a breakdown of the questions and answers from that event.
About our Guest Speaker – Matt Tyler
Matt is Kingsbridge’s IR35 Consultancy Manager. He previously managed an IR35 Consultancy Team at Larson Howie and before that worked at Qdos for 6 years. Matt has an in depth understanding of IR35, the case law surrounding the legislation and heads up Kingsbridge’s IR35 Consultancy Team.
IR35 Contractor FAQ
In a nutshell, IR35 is a bit of legislation that was introduced by HMRC in the year 2000 to try and “counteract what they saw as being the rising threat of disguised employees”.
People who were doing the same sort of work as an employee were operating via a limited company even though they were controlled by the client. They were providing their personal service and there was an ongoing contract for forever. These people who are engaging as disguised employees were doing so just to pay a reduced amount of tax.
HMRC introduced IR35 to try and counteract it, essentially under the guise of making sure that everybody pays the correct amount of tax. It has spiralled out of control a bit since then and HMRC suggested that there was a lot of non-compliance going on, hence why they’re changing the rules as of April. Now the end-client agency for medium and large companies is responsible for determining status, not the contractor. That has been done in a move to try and make things easier to police on all sides and make things a bit fairer.
The IR35 rule set has been in existence since the year 2000; since 2000 through to 2017 for the public sector, and until now for the private sector, it’s been the contractor’s responsibility to determine status.
Since 2017 in the public sector, and now in the private sector, that responsibility has shifted. It’s the responsibility of the end client to determine the status and pass that down the contractual chain to the contractor. So, instead of the contractor bearing the liability for a wrong decision, it’s the end client or fee payer who will be responsible for determining the status of the contractor and bearing the liability if that decision is wrong.
Arguably, this is a better setup because ultimately it is the end client who has control over whether a contract is inside or outside of IR35. Previously, because they had absolutely no risk of an IR35 investigation, or any liability, clients or agencies just didn’t care. It does, however, cause some issues from the contractors perspective because it strips control out for your hands, which is the whole point of being a contractor.
The general change is that it is no longer the contractor’s responsibility to determine status, that responsibility now lies with medium or large end clients that have some link to the UK. If the end client is small or outside of the UK entirely, then it remains the contractor’s responsibility to determine status.
The public sector rule set is essentially being copied over to the private sector. However, there are some changes being made to it. Some specific changes that differ from the public sector ruleset:
Firstly, a status determination statement (SDS) needs to be produced. An SDS will outline precisely why that contractor is inside or outside of IR35. It will cover things like a contractor’s right substitute, if they’re working under the control of the client, are they subject to appraisals or disciplinaries, do they have to seek approval for time off, is there an end date to the contract, etc. The SDS is passed down the contractual chain and at the same time a copy is passed to the worker, the actual contractor doing the work.
Secondly, there is a dispute process that is being made available for contractors or anyone else in the contractual chain. This allows a dispute to be if they don’t agree with the decision that has been made. This is covered in more detail in question 20 below.
Long story short, no you don’t. There is a difference when it comes to being an employee for tax purposes and being an employee for employment legal purposes. Being an employee for tax purposes simply means you pay the equivalent tax of an employee – that’s it. There are no additional benefits, thrills or anything like that. Being an employee from a legal or employment standpoint means that you do get those benefits. According to IR35, you are an employee for tax purposes only.
It won’t really. It’s not intended to apply to agency workers operating via an umbrella company or something similar. It, as a rule set, only applies to limited company contractors and partnerships. So, it shouldn’t affect agency workers.
No, sole traders are subject to something that is referred to as employment status, not IR35. Employment status works similarly to IR35 except it’s more focused on the contest of control than it is for the others, which are substitution, mutuality of obligation, and control for IR35. For employment status it’s supervision, direction and control, mutuality of obligation, and substitution or personal service.
The rule set changes from April 2021 don’t apply to sole traders, they’re subject to an entirely different set of laws.
If you are working with an Irish-based company and you pay Irish taxes then you are not a tax citizen of the UK and so IR35 isn’t intended to apply to you, even if there’s a dual taxation agreement. It will only apply if you are a UK taxpayer and your end client is a UK-based entity. There are some caveats to that, but I’ll cover that in the next question.
Yes, you absolutely can. Initially you need to look at whether the end client is a UK-based entity. If it has no UK-based ties, the new rule set won’t apply – you will be responsible for determining your own status.
If you’re UK taxpayer and the end client is based in, for example, France but has a UK branch or is part of a larger group of companies that has a UK presence, then that end client will need to consider IR35. If they have no ties to the UK they don’t need to.
This only counts if they are a medium or large entity as per the companies act. If they’re a small end client, this goes for inside of the UK too, there is no requirement for that end client to determine status on their contractors. It falls back, once again, onto the contractors.
The employee. The way that they would work is the fee-paying entity would essentially put the individual on their payroll and pay them directly.
There are a lot of different ways you can go about confirming a contractor’s determination.
HMRC’s CEST Tool – you can put contractors through CEST but have a backup system to double check the results. The problem with the CEST is that they don’t consider things like mutuality of obligation to the degree that they should.
You need to make sure that the outcome from CEST or any automated tool is an accurate reflection of how the contractor is operating. The best way of doing that is to speak to the contractor themselves and get them involved in the process. They will very quickly tell you if they think there’s an issue with what you’re presenting as being their status.
Another way would be to have a look through your processes. For example, when it comes to the right of substitution or the levels of control, is the contractor subject to employee benefits like Christmas parties, training, that sort of thing. Look through those processes and make sure you have a solid and fixed regime for what happens if the contractor wants to substitute. You can more confidently answer questions around the contractor’s status and know what you’re going to say and know that what you are putting in the SDS or other documents is accurate.
This comes down to who your ultimate end client is. That can be quite a difficult decision but it’s the person deemed as being your client, the one who you are delivering the services to who, is responsible for making an SDS for you. They then pass that decision down the contractual chain to the fee-paying entity who is responsible for paying your company. That fee paying entity is the one that bears the liability for the incorrect determination, assuming that reasonable care has been taken when concluding your eligibility.
For more information on reasonable care, check HMRC’s Employment Status Manual: ESM10014
It depends on if the end client is a medium or large client or not. From a contractor’s perspective, after April 2021, if the end client is medium or large you have no obligation to do really anything in relation to IR35.
If you wanted to the you could go and do third-party contract reviews, but the only benefit would be to make sure that tax prior to April 2021 is covered and that you are certain of your status prior to the changes that are coming in April.
If your end client is a small client, as per the companies act, then once again it’s your responsibility to determine your own status. It would then be in would be in your best interest to have a contract review done.
A recruitment agency can really help the end client by offering to take on board a portion of the work in relation to determining status. There’s nothing in the legislation that says that a third party can’t provide an SDS for an engagement, so it is entirely reasonable for a recruitment company to take on board a process that lets them produce an SDS for the entire contractual chain.
Another thing that the agencies can do is work closely with contractors to try and get a good feel for how that contract is operating. This makes them beneficial from an IR35 perspective because, for example, when the client is trying to place a role they may want to get a feel for whether or not that position is likely to be inside or outside of IR35 ahead of time. The agency knows what sort of contracts are out there, what their strengths are, etc., so it can make that process a lot smoother.
So really agencies recruitment agencies are going to be very important in the new regime in respects to linking together the end client and the contractors so an accurate status determination could be made.
A timesheet is going to be considered of very little standing when it comes to IR35. Quite often a timesheet is used simply as a means of budgetary control for the client. It isn’t intended to control the contractor in any way if you are already including your hours on an invoice. However, using timesheets isn’t going to hurt and to some degree using their clients self-billing system isn’t going to provide too much of an issue either. The question that may need to be asked is why the client is using that system. If it’s to control you in some way then you’ve got a problem, if it’s just to manage their own budget then there’s no harm in using it.
An outcome-based delivery approach may be where you get paid upon delivery of set milestones or set deliverables. Arguably, that could be a good thing from an IR35 perspective because it means that the contractor can profit from good management of their business.
For example, they client has six deliverables, and each deliverable is estimated to take about a month, 6 months total. If you can complete all deliverables in just 3 months, you still get paid for all six deliverables. You’re then free to move on, get a new contract and start making more money.
However, there is also a financial risk element. If you take longer than 9 months to complete the 6 deliverables, you’ll still only gets paid the same amount as it was originally agreed, and you’ll lose out on the ability to work elsewhere and earn more money.
In my opinion, I don’t think it will be cancelled and I don’t think it’ll be delayed. HMRC originally pushed it because of COVID-19. Since then, they’ve had to output a lot of money in respect to the job retention scheme and they will need to start recouping that money. The changes to IR35 will be an easy win for them.
HMRC will begin to collect more in tax revenue because many companies will push contractors inside of IR35. So, it’s a quick an easy revenue stream that they will not likely be willing to give up.
This is similar to the previous question about Irish contractors. Again, this will depend on several criteria:
- If the end client operates in the UK and is a medium / large company, the end client will be responsible for determining IR35 status.
- If the individual who engages in the contract is a UK taxpayer, then in that situation the end client will determine the contractor’s status and the fee payer pays the fees accordingly.
- If the end client is medium / large and is based in the UK or has UK ties but the contractor is a non-UK taxpayer, then IR35 does not need to be applied because the contractor doesn’t pay UK tax.
- If the end client is a small company and is based in the UK and the contractor is a UK taxpayer then the contractor must determine to their own status for IR35 purposes.
No, because they’re part of the larger group of companies. If the large group of companies is tied together, even if they’re all small companies, collectively there would be a medium or large company.
The end client has no authority to tell you how to run your company as a contractor. However, what the end client can do is say to you that they are no longer engaging contractors or they’re not willing to entertain a contract with you if you aren’t operating via an umbrella company or something similar. You do have to be aware that there will be potential repercussions from a contract perspective.
Yes, you can. There is a dispute process for anyone in the contractual chain. This allows a dispute to be someone doesn’t agree with a decision that has been made.
For example, the contractor disagrees with their SDS and says, “well no, I can substitute, I’ve got proof here that I’ve done it in the past”. If they present that evidence to the end client then the end client needs to consider the evidence that’s produced and then revise their report accordingly.
The contractor can raise a dispute at any point in the contractual period and once that dispute has been raised the client has 45 days from then to respond to it.
The same process applies for the agencies. If an agency doesn’t agree with the determination the end client has made, they can also raise a dispute and the client must respond to it within 45 days.
However, the dispute resolution process doesn’t start until the 6th of April. So, if the end client has provided you with an SDS already, which would be prudent of them if you have a contract that straddles the 6th of April, whether they honour a dispute is entirely under their control.
If the end client is UK based and has UK based ties then they initially will need to be considering IR35 but if the contractor doesn’t pay UK tax in any way then IR35 doesn’t apply.
Assuming we’re referring to statement of work as being an outsourced service provision. In the short term, I see outsourced service provisions becoming more commonplace in the short term.
An example of an outsourced service provision:
A client wants a building built and engages an outsourced service provider who will take on all the work and deliver the building by an agreed date. The provider locates architects, builders, bricklayers, etc., and manages the whole process. When the project is finished, the outsourced service provider hands over the keys and the contractors never had to interact with the end client.
However, I can see HMRC cracking down on it to some degree. There is also the potential risk that if it’s not a genuine outsourced service provision, it’s just dressed up to look like one, there’s going to be some penalties.
Technically, from April the end client has all the power to say that you are inside of IR35. In this case, it appears that the client has done is what’s referred to as a blanket determination. If you look at the Employment Status Manual – ESM10014, which details reasonable care, one of the first points you’ll see is about not taking reasonable care. An example of not taking reasonable care is making blanket determinations, so saying everybody is inside of IR35 and not taking a case-by-case approach with contractors. HMRC can investigate and can penalise clients that are doing this.
It’s worth pointing out and telling them they’ve not taken reasonable care. In the public sector, NHS digital was investigated by HMRC and decided that although they agreed with their determinations, they didn’t take reasonable care in concluding on those determinations. They were fined £4.3 million.
This depends on whether the end client is small or medium / large.
If the end client is small, it’s the old rule set that applies so the contractor is responsible for determining status and they’re responsible for liabilities if that determination is wrong.
If the end client is medium or large, then it is the end client that’s responsible for that determination and the liabilities. However, assuming reasonable care has been taken that liability then bounces down the contractual chain to the entity that’s responsible for paying your company. In a traditional arrangement that would probably be your agency, however when you’re engaging directly with the end client, they can also be the fee payer so will bear the liability. There is no risk to the contractor from an IR35 perspective.
One thing you will see popping up quite often is the requirement in contracts for contractors to carry some form of IR35 insurance that covers the whole contractual chain. I don’t think there’s any issue with that because it is quite often a benefit to the contractor as well as the agencies. It will also make you more attractive to end clients and agencies for your role and it should also cover you if the end client is a small company where the liability is your responsibility.
IR35 as a rule set is determined entirely on historical precedence, so case law that’s been established over the years. It started with a piece of case law from 1968, Ready Mixed Concrete Ltd v Minister of Pensions.
The case set a precedent for what was referred to as a “master and servant relationship”. They held that employment under a contract of service exists when:
- a person agrees to a perform a service for a company in exchange for remuneration; and
- a person agrees, expressly or impliedly, to subject himself to the control of the company to a sufficient degree to render the company his “master,” including control over the task’s performance, means, time; and
- the contractual provisions are consistent with ordinary contracts of service.
In terms of IR35 these three status tests refer to:
- Whether there is a requirement for the personal services of the individual.
- What level of control the contractor is subject to. This is split into four tests which are what the work is, when the work is done, where the work is done, and how the work is done. For example, in the contract the client may decide what the work is, but the contractor should determine how the work is done things like that need to be considered.
- Finally, mutuality of obligation. Essentially, there should be no obligation for contractors to accept and there should be no obligation for the end client or agency to offer any work to the contractor.
There is a whole ream of minor status tests that may also point towards a contractor being outside of IR35 including whether the contract takes financial risk, do they provide their own equipment, do they work from a home office, have they got any sort of large expenses that an employee wouldn’t be required to bear such as being required to carry business insurances or paying for an office separate to their home premises, or software licenses.
It all depends on how the contractor is treated on the client site, are they seen as being part and parcel of the client’s organization or not.
It would hint towards it, but it would only be a minor factor. Again, the more important indicators are whether there’s a requirement for you personally to provide the services or if you could provide a substitute. Does you personally having a company email address affect that?
If there is a good reason that you are using the client’s hardware, that is going to be defendable, for example, data protection or health and safety. Using the client’s email address would be more difficult to argue. It’s going to go down as a negative but only a small one.
This is a very tricky question. I can’t say with any certainty who the end client is because I’m not privy to the contractual chain. However, the considerations that you must make are whether you’re delivering services to the tech consultancy or directly to the US-based client.
If the US-based client has outsourced the services to this tech consultancy and you’re delivering your services to the consultancy, the consultancy would be your end client.
To be certain, you should speak to the other parties to see how they see things in terms of IR35.
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