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IR35 Advice Centre

 

IR35 Compliance Guide

IR35 Compliance Guide
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IR35 Guidance

 

IR35 Compliance for Contractors

Despite changes to the administration of IR35 from April 2021, the way in which it is determined remains the same.

Below we explain the main status tests that need to be considered to assess IR35, how to comply with the legislation and why. (Please note that this is only a brief guide; it is not intended to be a comprehensive analysis of employment status).

If you have any queries regarding IR35 or the below IR35 compliance guide, please do not hesitate to contact our consultancy department on 0116 2690 992 or contracts@qdoscontractor.com

 

Who is responsible for IR35 compliance?

 

The party responsible for IR35 compliance depends on when and with who you are contracting. Since 2000 when the legislation was introduced, it was the sole responsibility of the contractor, however, due to IR35 reform in both 2017 and 2021, this is not always the case.

The responsibility for IR35 lies with the contractor if:

  • you are providing services to a client in the private sector which is classed as a small company under the Companies Act 2006

The responsibility for IR35 lies with the end client/fee-payer if:

  • you are providing services to a client in the public sector
  • you are providing services to a client in the private sector which is classed as a medium or large company under the Companies Act 2006 from 6th April 2021

The off-payroll working rules, introduced in the public sector in 2017 and to the private sector in 2021, mean that it is the end client’s responsibility to determine IR35 status. It will also be the fee-payer's responsibility to deduct the relevant tax and National Insurance from source where you are determined as 'inside IR35'. For the private sector, this applies only to medium-large clients.

Every member of the contractual chain inbetween is responsible for ensuring they contribute to the compliance of an engagement by passing the status determination statement along the chain.

Read more about IR35 changes in the private sector.

IR35 Status

 

The key factors which determine your IR35 status

 

It is important to note that each working arrangement is reviewed on its own merits and all of the positive and negative elements of both the written contract and working practices will be weighed up in line with case law in order to provide a balanced opinion.​

When considering overall IR35 compliance for the entire engagement, it truly is a mixture of different factors, not simply the written terms. You should ensure that any contract proven to be outside of IR35 also matches the working practices of that engagement. So, if the contract says you are expected to provide your own equipment for the services, you should make sure that you are not using any client equipment during the provision of the services. This is because when determining IR35 status, the working practices are seen to hold more weight or are also referred to as the reality of the engagement.

What are the IR35 tests?

 
  • Office Holders

  • Right of Substitution/Personal Service

  • Control

  • Mutuality of Obligation (MOO)

  • Financial Risk

  • Right of Dismissal

  • Part and Parcel of the Organisation

  • Exclusive Services

  • Intention of the Two Parties

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close up of railway track

HMRC’s evidence to Lords IR35 inquiry is published

 

But the tax office’s submission doesn’t tell the full story of IR35 reform to date

HMRC has submitted its written evidence to the Lords inquiry into IR35 reform in the private sector, claiming it’s too early to assess the impact of the changes, that CEST is fit for purpose and that the reform has only impacted 180,000 contractors. 

In October, the House of Lords Finance Bill Sub-Committee launched its follow-up IR35 inquiry, where it invited interested parties to share their view of IR35 reform, which was introduced on 6th April 2021. 

From asking if the changes have made it more difficult for businesses to engage contractors to exploring the effectiveness of the government’s IR35 tool, CEST, this inquiry will build on the findings from the investigation into public sector reform in 2017.

In this article we explore the main talking points from HMRC’s eagerly anticipated submission.


‘Too soon to say’ if reform has created difficulties 

Throughout the document, HMRC says it is ‘too soon’ to evaluate the impact of reform, often in response to questions relating to the perceived challenges faced by contractors and businesses. 

This has caused some controversy, particularly among contractors, one third of whom (surveyed by Qdos upon the introduction of the changes in April) reported being 

placed inside IR35. 50% of this group planned (39%) or were considering (11%) challenging their client’s decision.

Further research, conducted by trade body IPSE, suggests that 35% of contractors have quit contracting because of IR35 reform, opting to go employed, work overseas or stop working altogether.


180,000 contractors impacted by reform

HMRC claims that approximately 180,000 contractors have been affected by the introduction of reform in the private sector, along with 60,000 medium and large businesses and 20,000 employment agencies. 

However, given that recent government figures measure the umbrella workforce at 500,000 (a way of working inextricably linked to contracting and IR35) the 180,000 figure touted seems wide of the mark. 


HMRC expects to net £3.8bn by 2026

IR35 reform will earn the Treasury an extra £3.8bn by the 2025/26 tax year, according to HMRC. While these predictions may be realistic - as more contractors are either deemed inside IR35 or operate on the payroll - the number of blanket IR35 determinations and PAYE-only ultimatums being issued to contractors casts doubt over how much of this additional revenue is justified. 


Taxman claims it will ‘always stand by CEST’

On more than one occasion HMRC says it will or has always stood by results delivered by the government’s IR35 tool, CEST, “provided the information entered remains accurate and the tool is used in accordance with our guidance.”

This offers a false sense of security to businesses relying on the tool. For example, HMRC handed NHS Digital a £4.3m tax bill after it was decided that this department of the health services had engaged contractors under the wrong IR35 status - based on answers provided by CEST. 


HMRC claims victory in PGMOL

One of the many issues IR35 experts have with CEST is that it’s not aligned with IR35 case law. For example, it largely overlooks one of the key IR35 status tests, Mutuality of Obligation (MoO), presuming that it exists in every engagement. This is despite recent IR35 cases being won on MoO not being present.

An ongoing employment status case (PGMOL v HMRC) hinges on whether MoO exists in the relationship PGMOL held with 60 professional football referees. While the Court of Appeal recently instructed the case to be reheard at the Upper Tier Tribunal, if HMRC was to lose this case it may give many contractors grounds to appeal IR35 decisions based on CEST.

In its evidence, the tax office states that the Court of Appeal judges agreed with their view of MoO. In reality, this debate wasn’t explicitly held, with the case to be reheard in due course. 


HMRC talks up its IR35 support services 

When asked by the Lords how well HMRC has supported businesses with the implementation of reform, the tax office pointed towards 57 webinars, over 100,000 emails, letters and messages, and 949 telephone calls with the largest businesses in the lead up to 6th April 2021. 

Even so, there are concerns regarding the quality of this support. An indicator of this is the 56% of contractors who, immediately after the arrival of reform, told Qdos they had not yet received a Status Determination Statement (SDS) from their client despite it being a legal requirement. 


Further promises to tackle non-compliant umbrella companies 

In response to IR35 reform, some businesses have needlessly insisted that all contractors operate via umbrella companies, where the rules are no longer a consideration. As a result, more contractors now operate via umbrellas. But while there are plenty of compliant umbrella providers, the fact that the industry remains unregulated is a major worry. 

While different ways HMRC plans to tackle the proliferation of disguised remuneration schemes (which pose a danger to contractors) are welcome, many will feel that regulating the industry is the only way forward.

To round up, many will feel that the tax office’s written evidence falls short, as our CEO Seb Maley, told The Freelance Informer:

“The tax office says it’s too early to assess the impact of the changes and if reform has made it more difficult for firms to engage contractors. It’s not too early. While more firms are getting to grips with reform, the fact of the matter is that it's created challenges and resulted in contractors being forced onto the payroll.”

By:Benedict Smith
 
 

IR35 Guidance

 

How to comply with the IR35 legislation

When it comes to complying with the IR35 legislation, you should consider the following steps:

  1. Review each engagement for IR35 status. This includes assessing both the written terms but also your working practices (the reality of the engagement) against the key factors above.
  2. Check that your working practices mirror what is detailed within your contract. The reality of the engagement holds more weight than the written terms so it is important to ensure your contract is a true reflection of the engagement.
  3. Keep a record of your due diligence. This could include copies of third-party contract reviews, a Confirmation of Arrangements and/or relevant correspondence which may help evidence your position.
  4. Ensure the relevant tax and national insurance is paid for your status. Being compliant with IR35 is often confused with being 'outside IR35', but compliance really just means paying the correct tax for your employment status. So if you are operating 'inside IR35' for an engagement, then a deemed payment must be made.
  5. Maintain up-to-date assessments of your engagements - ensuring reassessments throughout the engagement or if there are any material changes
  6. Keep an eye on relevant news for any changes or updates to how status is determined

Since April 2021, whilst it might no longer always be the contractor’s responsibility to determine their IR35 status, contractors should still be focusing on ensuring compliance within their engagements.

It is important to remember that the reform does not apply to any engagements with companies classed as small as per the Companies Act 2006 and contractors are still liable for any services provided prior to April 2021. See above for more information on who is responsible for IR35 compliance.

 

 

IR35 compliant contracts

 

An IR35 enquiry from HMRC will always begin with a request for copies of your written contracts relating to the accounting period in question, with proof of why you consider it to be outside of IR35. A robust contract may stop a full-blown investigation in its tracks, so it is essential to ensure compliance in this respect. A variety of status tests, outlined in this guide, are used to assess your contract, with no single test putting you inside or outside the legislation. Both the contract and working practices will require assessment as a whole using all of the status tests to determine your employment status.

​The contract does not need to be in writing - an oral or implied contract is legally binding if the parties intend it. The terms of the contract can be collected from the circumstances surrounding the engagement.

​It is not only your contract with a recruitment agency which may be assessed; in Usetech Ltd v Young the High Court decision made it clear that the "upper level" contract between the agency and the end client was to be considered in deciding the status of the worker, notwithstanding the terms of the agency's contract with the worker's Personal Service Company. Most contractors, however, will never see the upper level contract or have any rights to.

​HMRC will look to see if you have taken ‘reasonable steps’ to ascertain your status and so it is imperative to have each contract reviewed in order to display this. View our contract review services here.

Having your contract reviewed by an independent third-party expert, will give you a better idea of where your engagement sits in regard to IR35 status. While such a review gives you the IR35 status of that contract, however, in order to find out the overall IR35 status of the engagement you will also need to undertake a review of the working practices of that engagement.

Working Practices

 

The working practices of an engagement is how those services are provided in reality.

The written contract between the contractor and the end client could be perfect in terms of IR35, demonstrating key areas such as substitution, control, non-exclusivity and mutuality of obligation but this will also need to be proven in practice. Although the written contract remains important in determining status, should you be unfortunate enough to be subject to an IR35 enquiry, HMRC will look closely into your working relationship with your client.

​In an ideal world, we would like an IR35 friendly contract mirrored by the working relationship with the client.

If you are subject to a status enquiry by HM Revenue & Customs, the Status Inspector will normally want to obtain information from both you and the end client about the practical working arrangements of each engagement. This is known as constructing the "hypothetical contract" between the worker and the client. It is vital therefore that there is a clear understanding between you and the client about the nature of your day-to-day working relationship. This will also apply to situations where there is no written contract.

​We offer services for assessing your working practices, including a Working Practices Assessment and a free Confirmation of Arrangements document which can both be assessed by our consultancy team.

 

Why is IR35 compliance important?

 

Non-compliance with IR35 could leave you with not only the weighty cost of defending yourself against an enquiry from HMRC but also the potential burden of being saddled with the cost of any unpaid taxes should you be caught by the legislation.

Anyone can be investigated by HMRC, and should you be found to be inside IR35 but have paid tax as an outside IR35 contractor, you will be required to pay back the tax, interest and potential penalties as a result.

You should also bear in mind that an enquiry from HMRC is by no means a walk in the park, not only can these proceedings be extremely stress-inducing but they also have the potential to go on for a long time. The cost of defending yourself from an IR35 enquiry can very swiftly mount up if you don't have an insurance policy.

For services provided under the off-payroll working rules (i.e. in the public sector since 6th April 2017, or to a medium-large private sector business since 6th April 2021), you will not hold any liability as the contractor and it will be your client of fee-payer who will be subject to such an investigation in relation to these services.

 

 

Top 10 Tips for IR35 compliance

 

1. Have your engagements assessed for their IR35 status, by doing so you can evidence compliance with the legislation should your engagements ever come into question from HMRC. By opting for a mixed approach of both a contract and working practices review, you will have a clear picture of the reality of your engagement in terms of IR35 status.

2. Educate yourself about what IR35 might mean for your engagements and keep up to date with the legislation. By using the wealth of online articles available to you, you stand a better chance of ensuring compliance in the way you provide your services by simply knowing what could be classed as inside or outside of IR35.

3. Ensure communication within your contractual chain. By doing so, each party will know what they are accountable for. By keeping track of each other and the determination process it will be easier to make any necessary changes to better IR35 status.

4. Take care when checking that your working practices accurately reflect the written contract you have signed. Not only should you be actively monitoring the way you provide the services to ensure you are acting in a way that is compliant with the terms of your contract, but you should also be collecting evidence to prove this is the case.

5. Make sure you are providing services in a manner that is consistent with working outside of IR35 or pay the relevant taxes if not.

6. Collect evidence to show you are treated differently to your client’s employees. Examples of this would be a record of any relevant emails or other forms of contact with your client.

7. Look for contracts that are outside of IR35 at their very base level, in other words, project-based contracts rather than time-based contracts. Always have a good read of the contract before signing. Another example of this is that you should look to see that you are not individually named within the contract and are only referred to as a business.

8. Seek to attain a Confirmation of Arrangements. Having a CoA signed by your end client greatly increases your chances of successfully defending yourself from an IR35 enquiry. For more information on what a CoA is and how to attain one, see here.

9. Show you operate a genuine business and that you are not part in parcel of your end client’s company. Examples of this would be investing in stationery for your business, such as letterhead paper, or simply wearing an ID badge when attending your client’s site.

10. Have proof that you have taken financial risk on behalf of your business. Examples of financial risk would be holding relevant business insurances such as Professional Indemnity Insurance or Public Liability Insurance. Both of which we can provide for you here at Qdos.

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