Update: March 2020 The following advice was written in preparation for the implementation of announced changes to the IR35 regime, which have now been postponed. This means that the responsibility for determining whether a contract falls inside or outside of IR35, still currently resides with the contractor. Best practice would still suggest that the following process should still be adopted now and in preparation for the changes which will (most likely) come in April 2021.
What is IR35?
IR35 first came into force in April 2000, a series of tax anti-avoidance laws that were introduced to tackle the problem of ‘disguised’ or ‘deemed’ employment. This legislation was designed to target organisation that engaged workers on a self-employed basis rather and an employment contract in order to avoid paying employer national insurance.
Private sector IR35 reform is designed to tackle this avoidance and ensure that end-clients and personal service companies are paying the right amount of tax. The reality is that the underlying law will stay the same, therefore if an assignment is deemed to be outside IR35 prior to the 6th April 2020 then it should be outside moving forward. The genuine contractors that have supported our clients so well, and that represent a vibrant and increasingly important part of the UK economy, should be able to continue to work outside of IR35.
The proposed reforms shift responsibility and liability for determining employment status and deducting tax onto the end user in the supply chain. It is the end user that the HMRC will now look to for the payment of taxes, fines and penalties, should an assignment be deemed incorrectly outside of IR35.
What does this mean for Clients and Contractors?
All current and new contracts will be subject to an employment assessment, to determine that whether they fall inside or outside of the scope of IR35. This assessment will be conducted with all reasonable care as outlined by HMRC guidelines, the output of which will be a ‘Status Determination Status’.
Should the ‘Status Determination Status’ deem that the contract falls inside of IR35, we have a statutory responsibility to ensure income tax, employers and employee national insurance, and any other taxes (such as the apprentice levy) are paid. At this point, a contractor has a two options;
- Continue to work through their PSC/Limited Company under the ‘off-payroll’ rules
- Engage with an umbrella company
Where a contract is found to be inside IR35, regardless of which of the two options that the interim takes, it must be acknowledged that the cost of employment will increase, in the form of the Employers National Insurance Contribution and Apprenticeship Levy.
What is the Status Determination Assessment?
The Status Determination Assessment is essentially a test used to establish whether a contract falls inside or outside of IR35. HMRC considers a number of different factors when considering whether a contracts falls inside IR35, the principal three being Substitution, Control and Mutuality of Obligation, but these are not the only considerations and HMRC will look at the overall picture also Business on own account, financial risk, exclusivity, length of engagement, termination and of course, whether it is the intention of the parties to enter into a service contract or employment. There are of course a variety of tests available, including the HMRC’s own tool, CEST (Check employment status for tax), which have been proven to not be absolutely reliable, giving an inside determination if only one element of the overall assessment is failed.
We are partnering with Larsen Howie, a leading IR35 Advisor and Kingsbridge, a specialist insurance provider to present our contracts and clients a considered, protective and commercially viable solution.
Key to this solution is a strong Status Determination Statement, which should demonstration that we have fully executed our duty to take ‘reasonable care’. Our Status Determination Assessments will be run using the Larsen Howie Status Review Service, with reference to the CEST tool. In conjunction with Laron Howie, we will work with you, our contractors and our clients, to ensure that you have adequate information to make an accurate assessment.
Once a Status Determination Statement has found a contract to sit outside of IR35, we will introduce you to our insurance partners Kingsbridge. They have developed an insurance policy, IR35 Protect, underwritten by Zurich Insurance, that will protect all users in the recruitment supply chain against any claim by HMRC (including legal costs and any fines and taxes).
It is already a requirement of working through HedgerWay, that contractors operating outside of IR35, have professional indemnity and public liability cover in place. Having appropriate insurance cover in place is a demonstrable difference between a contractor and an employee, as it is simply not a requirement for an employee as they would be covered by their employer’s own provisions. The holding of insurances helps demonstrate a clear distinction between contractor and employee, as well as demonstrating discernible financial risk, which can be useful in showing that the contractor is operating a genuine business in any IR35 enquiry.
Gordon Brown first introduced IR35 in 1999 and we can’t disagree with the fundamental principles, disguised employment is neither good for society, nor the economy. We’ve been attending conferences, seminars and briefings on the potential impacts of IR35 for the last 20 years and some of practices employed by employers and agencies, are quite frankly shocking. Whole production lines in factories where low paid workers are paid through personal service companies to reduce employment cost whilst at the same time reducing the money in their pocket is very hard to defend. This is however not relevant to our joint situation and whilst IR35 has a role to play in redressing these issues, however it should not end the vital, specialist and flexible resource which is a significant contributor to the UK economy.
Here to help
We are here to help you through this transitional period and welcome the opportunity to answer any questions or support you with any concerns that you may have. Please speak to your consultant directly or drop a line to firstname.lastname@example.org and we’ll come straight back to you.
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