How to Prepare for IR35 Reform in 2020
If you’re a contractor with a personal service company, also known as a PSC, it’s very likely that you’ll have heard of IR35 by now. As you might well know, the legislation is complex and has been revised several times since its initial launch back in 2000. In a nutshell, IR35 is designed to combat ‘disguised employment’, which occurs when a contractor’s engagement reflects employment, meaning they should be taxed like an employee.
In recent years, the IR35 has been tweaked. IR35 reform, also known as the ‘off-payroll rules’, was rolled out in the public sector in April 2017 and are set to arrive in the private sector in April 2020. As a contractor, you need to know how to prepare for this change in legislation, which will see the medium and large clients you work with administer your IR35 status.
How is IR35 changing in April?
Before we get into the specifics, here’s some background information for you. IR35 was designed originally to prevent the perceived tax avoidance involved when an employee switches to contracting, despite still working for the same company in essentially the same role. These contractors were dubbed ‘disguised employees’ by the taxman. According to HMRC, the motivation for this move is to drastically increase a worker’s take-home income given they won’t need to pay NI contributions or income tax when operating through a personal service company – however, as we all know, contractors do not work independently simply to avoid tax.
Anyway, moving on, the most fundamental adjustment to IR35 as part of the reform shifts the liability of deciding whether an engagement falls within the legislation from the contractor to the fee-payer, whether that’s your client or the recruitment agency you work through.
This means that you’ll be relying on your clients or agency to understand the rules and carry out an employment status determination properly and with reasonable care. Given many mistakes were made after reform was introduced in the public sector in 2017, contractors are worried their clients will wrongly determine them inside IR35.
Can I protect my IR35 status?
All is not lost – you can increase the chances of your client making the right decision even though you won’t have the luxury of determining your own status. The best way to protect your current way of working is to be proactive. Take it upon yourself to check which side of the legislation you currently sit and communicate to your client any changes that need to be made to stay outside IR35 before the rules change in April.
How do I make sure I’m outside IR35?
It’s always best to get a professional opinion, but there are some basic rules you can follow when it comes to your contract and working practices. An IR35 contract review is a great place to start and is advisable even if you’re not concerned about your status. A working practices review is also a worthwhile investment, as often the way you work isn’t accurately reflected in your contract.
Which factors will be taken into account?
There are plenty of things to consider when making an IR35 decision, but the following are the three key ‘status tests’ which, more often than not, will give a strong indication of whether your contract belongs inside or outside IR35.
Control
Is it you or is it your client control that controls the way you provide your services? If your client has a say over certain aspects of your work, they could be viewed as your employer, meaning you belong inside IR35. That sounds horribly subjective and unfortunately, it is.
There are many ways that your client can have control over your working day. If they dictate your working hours, then HMRC could argue that they’re an employer. If you have a uniform, need to ask permission for time off, report to a manager or supervisor or have any ‘job perks’ at all, you could land on the wrong side of the legislation.
A genuine PSC contractor should be free to choose the way they work, when they work, and where they work from.
Substitution
If you hired a builder, would you care if the exact builder you’d spoken to completed the job, or would you be happy with any qualified builder carrying out the work? The general consensus is that as long as the job gets done, it doesn’t matter who does it (provided that they’re qualified).
The above example is the right to substitution, which has long been seen as pivotal when demonstrating that a contractor is outside IR35. It’s a common misconception that this clause means you need a substitute immediately to hand. Provided you have the right to send someone else to deliver the contracted services in your stead (meaning your contract doesn’t prevent you from subbing in another worker) it should count.
Mutuality of Obligation (MOO)
Do you expect your client to give you consistent work? Perhaps you feel like you can’t turn down a job from a regular client? If there’s an ongoing obligation to provide or produce work from either side, that’s Mutuality of Obligation. Genuine contractors and freelancers are hired on a project basis. They’ll agree to complete one job with no further expectation from either side past delivery. However, some are expected or expect to provide their services on a continuous basis, which puts them at risk of being assessed as inside IR35.
The common red flags for MOO are; if your contract includes a termination clause (like having to provide notice), only having one main client (this is particularly damning if your one client has included an exclusivity clause) or having a rolling contract as opposed to a fixed-length contract.
Perhaps the most important take away from this article is that contractors will be able to work outside IR35 from April 2020 onwards. Granted, the final IR35 decision will rest with your client (unless you’re engaged by a small private sector company), but that’s not to say by taking a proactive approach to reform you cannot safeguard your tax status going forward.
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