The Introduction of IR35 Off Payroll Working Rules
Prior to the introduction of the IR35 tax reforms the government estimated there were approximately £700m in taxes lost to the UK economy as a result of workers operating through intermediaries, disguised as employees. The IR35 off payroll working rules were introduced into the Public Sector in 2017 and then following a delay, implementation into the Private sector in April 2021. HMRC declared in Feb 2020 it would apply a light touch approach to organisations by way of a grace period for misapplication of the rules for a period of 12 months, this, however ended in April 2022. Since this time Rishi has announced that an additional £161 million would be invested in to HMRC to ensure employers comply with the IR35 legislation, by way of extending their debt management to recover an anticipated much greater amount of £3billion. The message from the government is loud and clear, organisations must comply with the rules and ensure they take ‘reasonable care’ at every stage of the process. We only need to look back at the events across the public sector, with the DWP and Home Office landing hefty tax bills of more that £87m and £33m respectively, to know that HMRC mean business.
What can Contractors do to Remain Out of Scope of IR35?
Whilst the private sector organisations may be feeling a tad lightheaded at the prospect of being audited. What does this mean for contractors and how can they remain Out of Scope?
All IR35 tests should consider 4 key elements; Mutuality of Obligation, Direction and Control, Substitution and Financial Risk. Contractors need to consider these factors along with the working practices of an organisation to gain a greater understanding of whether their engagement is genuinely outside of IR35. Essentially, the worker cannot be integrated into the business as an employee, so if you are operating under your own intermediary i.e. a Ltd Company under a contract of services, you should be operating on a business to business basis. This includes for example; identifying yourself clearly as a Contractor, working remotely where possible, utilising any substitution clause you have been offered as part of your contract, and being engaged to focus on key deliverables, rather than working to a job description. If you have your own mug in the cupboard, a designated desk and have attended office parties for the last 10 years, there’s a very good chance you would be deemed a ‘disguised employee’. In this case Off Payroll working rules would apply and your assessment and your taxes most likely would be brought into question.
IR35 Assessments – Taking ‘Reasonable Care’
It is important that the employee from the client that will be working most closely with you as a contractor completes the assessment as they have the best view of working practices, working requirements and conditions. Companies will be encouraged by HMRC to use the CEST tool but there have been many challenges reported with regards to the effectiveness as it doesn’t provide an outcome in all cases and the extent to which it considers Mutuality of Obligation. (See previous post). There are other tools available (recognised by HMRC) that in my opinion do more that CEST and therefore provide greater clarity and reassurance.
Any enquiry by HMRC will look at the actual working practices rather than just what is written and will consider how the terms and conditions of the contract are applied in reality. If following an investigation, you are found to be Inside IR35 you may be requested to pay back the Tax and NI that is due and any penalties that may be applicable based on whether or not you were aware of any inaccuracies in the working practices.
Contractor – Working Practices
If you are operating as a genuine contractor through an intermediary it is always a good idea to consider the contract alongside the working practices of the engagement. Notwithstanding this, your business should be set up to actively advertise your services including registering on job sites e.g. TalentToute https://talenttoute.com/and having a business website and or a LinkedIn business page. Should an employer or a representative from HMRC conduct any online pre-checks to see review your business, it should be clear that you are actively seeking clients and contracts as a business in your own right. Furthermore, you should have a business premises or a dedicated business space from which you can carry out your business.
It is also a good idea to question the terms of your engagement either via the Fee Payer (Recruitment Partner) or the End User (Client) themselves at the start or even mid term through your engagement. The longer you continue to work with one client the greater the sense of obligation from both sides, thereby increasing your risk of being Inside IR35.
If you do not agree with your SDS (Status Determination Statement) you do have the right to appeal.
These are just a few considerations to avoid being caught short of IR35 Regulations (from my HR perspective). Always check with Gov.co.uk or a lawyer if you have any queries relating to IR35.
HR Professional and Co-Owner, TalentToute