A Contractor’s IR35 Reform Checklist
The private sector IR35 reform is rapidly approaching – it’s now just a month away.
Despite a call for evidence issued by the House of Lords (which closed on the 25th February), Sajid Javid’s resignation from the Chancellor of the Exchequer post, and widespread industry outcry that was recently organised into a demonstration, it appears that HMRC is ploughing ahead with the off-payroll rules changes.
If you’re concerned about losing the right to set your own IR35 status in the private sector on 6th April and haven’t yet started to prepare, don’t worry, it’s not too late. Read on for some education around the subject and guidance on how you can protect yourself.
What is IR35?
IR35 is the ‘intermediaries legislation’, which is a set of tax rules that apply to those that work via an intermediary to provide the end-client with a service – a limited company or personal service company (PSC) are the most common instances.
Let’s give some context:
An IT consultant is contracted by ClientA. They are engaged and paid through their own limited company. This limited company is the intermediary between the consultant and ClientA, the client, and means that they aren’t providing their services directly. They have a contract for services, as opposed to a contract of employment, and therefore pay a reduced rate on any income tax and National Insurance Contributions (NICs). However, they don’t receive employee benefits like holiday or sick pay and must cover their own overheads, like equipment and travel.
The purpose of IR35 is to identify individuals that are abusing the above system to avoid paying tax. HMRC is aiming to catch what they call ‘disguised employees’ – workers who, to all intents and purposes, behave and are treated like employees in the workplace, but receive the tax relief illustrated in the example by contracting ‘on paper’.
How do I know if I’m inside IR35?
There are three main points to consider when determining IR35 status:
How much control do you have over your working day? If you have the below in your contract, you could be considered inside IR35:
- Inflexible start and finish times
- Specific days you must work for the client
- Lunch break times and duration
- Specific clauses stating the client has supervision and control over your work.
All of the above often appear in a contract of employment and can cause you to fail an IR35 test. Genuine contractors should have control over when and how they work by definition.
Mutuality of Obligation (MoO)
Are you free to choose the jobs you work? Is there any obligation from either party – the contractor or the client – to complete or provide work on a continuous basis? This is Mutuality of Obligation, or ‘MoO’ for short. If a contract specifies exclusivity or states obligated hours of work a week at a set rate, then it could be considered inside IR35.
Genuine contractors are able to take whichever projects they choose from whatever client they wish to work with. They should also be free to turn down work from any given client. HMRC’s CEST tool currently omits MoO, which is a weighty consideration in whether an individual can be classed as a contractor or not. To compensate, make sure the rest of your contract is watertight against Control and Substitution checks as well.
Right to substitution
Could you supply a substitute to do your role? This is usually a hypothetical question and doesn’t mean you must literally have a substitute ready.
If you call a plumber to fix a leaking boiler, would you care if it was specifically the plumber you spoke to on the phone that carried out the work, or just someone qualified to do the job? This is the right to substitution and is a good test of if a contractor is genuine. After all, an employee couldn’t send someone else to fill their place for the day at work.
Provided another qualified contractor in your profession could, in theory, be sent in your stead to provide the contracted services, then you would most likely fall outside IR35. However, if the client has specified that you can’t supply a substitute under any circumstances, you could be deemed inside IR35.
What is IR35 reform?
On 6th April, medium and large private sector companies will administer IR35 status, with businesses meeting HMRC’s criteria of ‘small’ remaining exempt from the changes. IR35 reform was introduced in the public sector in 2017 and applies to all organisations.
So to recap, contractors will no longer be in charge of deciding if they sit inside or outside IR35 unless they work with a ‘small’ client in the private sector. As part of these changes, the IR35 liability will transfer to the party tasked with paying the contractor – which will be your agency or client.
How can I prepare for the IR35 reform?
While the arrival of IR35 reform this may feel like your options are limited when it comes to preparing for the new rules, there are still steps you can take as a contractor to stay on the right side of IR35.
Get your own IR35 status determination
An IR35 contract review is the first port of call, and we advise you consider a working practices review to boot – it’s your actual behaviour at work that HMRC will scrutinise if you fall foul of an investigation, regardless of what your contract says. While CEST may be recommended by HMRC as the go-to tool for IR35 status determinations, it’s important to remember that there are other options available that are far more reliable.
Avoid exclusivity with one client
More practical advice that is within your control starts with ensuring you can prove that you are not exclusive to one client. It’s also important that you control your working diary and that you keep thorough up-to-date accounts. Last but not least, put the effort into bidding for more than one job at a time. While you might not be successful in even half the jobs you go for, you’ll have documents that say that you tried – which could be potentially case-winning proof that you are not beholden to one single client, and are therefore genuinely self-employed.
Promote communication with your client about IR35
Finally, it’s essential that you promote open communication with your end-client and recruiter. Maintaining a good business relationship with whoever decides your employment status has obvious benefits, but many end-clients are uneducated about IR35 and could make panicked IR35 decisions. Having a frank but respectful discussion with them about where you think you sit in the off-payroll rules is the best way to gauge their stance on your employment status.
If you’ve already had a contract or working practices review carried out and your opinions differ on your status, you can use this to reopen the conversation and demonstrate why you think you fall outside IR35.
What happens if I’m found inside IR35?
If you fail an IR35 status test, you can expect to pay around 25% more in tax every year, give or take.
If you feel that you’ve been incorrectly found inside IR35, there is no formal dispute system in place per se. HMRC has indicated that it expects end-clients to put in place a Client-led Status Disagreement Process, which would allow you to understand the basis of your assessment and therefore build a case to challenge your status, though your client will still have the final say. Contactors can challenge their status (or, rather, overpayment of tax) via HMRC’s IR35 enquiries contact page, however.
Should you find outside IR35 opportunities are limited, QAccounting has developed a solution for contracts deemed inside the legislation. This is an alternative to an umbrella company and allows you to continue operating through your limited company. You can learn more about this off-payroll solution.
Of course, if you are a genuine professional contractor, freelancer or consultant who is in business on your own account, you shouldn’t have anything to worry about. Read up on how the legislation works and apply best practice. It would also be worth having a defence prepared in case you’re investigated by HMRC because, whilst you may know that you’re legitimate, IR35 determinations are notoriously subjective. If you would like to speak to us, then please do not hesitate to get in touch and one of our friendly team members will be happy to help.