You will no doubt be aware of the proposed changes to IR35 (often referred to as the ‘off-payroll rules’) set to come into force from April 2020.
Our aim here is to ensure you are aware of the support that we can offer and also the steps that you can take in order to ensure your IR35 status is assessed fairly from April onwards.
The background: how did IR35 work before?
The responsibility for determining whether IR35 applies to your work has always been yours. You may have asked us to review your contract and/or working practices and we subsequently would have given you our opinion on whether IR35 applied to your assignment.
At SG, we primarily deal with what we consider to be ‘high-end’ professional services contractors who have specialist skills and who work on a project basis. The contracts we see will typically support this and if not, we have often suggested that you seek revisions to the contract before signing. Therefore, the vast majority of our clients are considered outside of IR35.
Our view on your IR35 status is based not only on our understanding of the legislation but also the vast amount of case law from the various decisions arrived upon at tribunal (dating back to what is often considered one of the most important ‘employment status’ cases of all – Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance 1968!).
However, from April 2020 your end-client will become responsible for determining your status. They must assess each assignment with ‘reasonable care’ and provide you with a ‘Status Determination Sheet’ that explains the reasoning behind their decision.
In the event that you dispute the decision, the legislation provides for a ‘client-led disagreement process’. In short, you have to provide evidence to the contrary and your client then has 45 days to respond or change their decision and provide a new Status Determination Sheet.
If you are considered inside IR35 from April onwards, your future invoices will be subject to tax and National Insurance in a similar way to if you were employed by your end client. Whilst it varies depending on the circumstances, for most this will mean between 20-30% additional tax liability, which will be deducted at source – with you receiving the net amount.
Lack of understanding
Most end-clients have little (if any) IR35 expertise. They have been told that they can use HMRC’s CEST online tool, answer a series of questions about your engagement and the tool will tell them whether IR35 applies.
The tool has been designed by HMRC and is therefore weighted in their favour. It is widely considered to be fundamentally flawed and yet the decision the tool arrives at will be relied upon by your end client to determine your IR35 status.
We have already seen some businesses make ‘blanket assessments’ – essentially ignoring that the legislation demands they take reasonable care and simply suggesting that all of their contractors are inside IR35.
We have also seen some businesses confirm they will stop using limited company contractors entirely from April 2020 with the option of leaving the role, going ‘perm’ or using an umbrella company, often the suggested alternatives.
We believe this approach is very short sighted – the contracting market exists because those businesses want an agile and flexible workforce in order to deliver their projects. Paying a higher day rate for ‘top talent’ without needing to provide employment benefits is a deliberate commercial strategy. The fact that tax advantages are available for contractors has always been the reward for associated risks.
In 2017, very similar rules were introduced to public sector organisations and a similar approach of blanket assessments and not using limited company contractors followed. Many either renegotiated their day rates (to compensate for the additional tax) or left and found contracts elsewhere. It wasn’t long before these organisations were forced to reconsider their approach as projects ground to a halt. We expect to see a similar cycle with the private sector roll-out. The question is how long will it take these businesses to realise the knock-on effect of their approach.
What you should do
If you are working with a client that will no longer engage with limited companies from April onwards then your choices are likely to be:
- Accept permanent employment; or
- Use an umbrella company.
What are the pros and cons?
For the first two, you will need to assess your situation, the market and any offer on the table – clearly, if you are offered a fantastic package to join as permanent member of staff then you may decide to accept! However, it is likely that the package will represent a significant reduction in your income so that will need to viewed against the positives of employment benefits and any so-called ‘job security’.
Use an umbrella company to your advantage
If you decide to continue the contract but via an umbrella company, speak to us. You should have seen our recent communications that detail a change to our services. We now include the use of SG Umbrella for no additional charge.
This gives you the flexibility to swap between your existing limited company and umbrella depending on the contract in place. As well as saving you an additional cost elsewhere, you will also benefit from having all of your financial affairs under ‘one roof’. We also offer some services that many others don’t – allowing you to continue making employer contributions to your current pension by way of an example.
For many others, the likely issue will be that their end-client either blanket assesses all contractors as inside IR35 or carries out an individual assessment but incorrectly arrives at an inside IR35 conclusion.
What are the next steps?
Your first action should be to request the ‘Status Determination Sheet’ that each business is required to provide. Once you have this, send it to us with a copy of your latest contract and we will carry out a review.
Whilst we acknowledge that HMRC’s CEST tool is flawed, for many of our clients it will still arrive at an outside of IR35 decision. This can then be provided to your end-client and the ‘client-led disagreement’ process should begin. Your client/agency may ask you to complete the tool yourself, if this is the case then you should also discuss it with us first.
HMRC have said that they will stand by the decision of the tool provided the answers given are factually correct. So for many, an outside of IR35 decision should be enough to reassure the end-client.
However, it is quite possible that businesses will refuse to reconsider incorrect or blanket inside IR35 assessments. The disagreement process has not been defined and we shouldn’t expect HMRC to focus their resources on ensuring end-clients comply – after all, they just want the additional tax.
It is therefore vital that contractors work together to challenge incorrect decisions. If our experience of the public sector reform is anything to go by, if the end-client is unwilling to reconsider, many will look elsewhere to find work considered outside of IR35 or seek to renegotiate pay terms in order to compensate. It would be far easier to simply do it right in the first place!
Caution should be exercised in accepting an inside IR35 decision from an existing client where you have previously operated outside of IR35. HMRC have said that they ‘have no plans’ to open retrospective enquiries into prior years but HMRC’s behaviour in recent years suggests this shouldn’t be relied upon.
Consider Tax Investigation Insurance
We have negotiated a ‘Tax Investigation Insurance’ policy with one of the UK’s leading IR35 defence specialists – Markel Tax.
For £10+VAT per month, you can protect yourself against any of the possible defence costs of a future IR35 enquiry. By its very nature, IR35 is a complex and often subjective issue and therefore the time and costs of an HMRC enquiry can be significant. Speak to us if you want further information.
In summary, we have always been behind the concept of any genuine IR35 reform that would correctly tax those working in the same way as employees. However, by pushing the burden onto UK businesses, who typically have no expertise with IR35 and then telling them they’ll pay the tax liability if they get it wrong, we can expect a very risk adverse approach from some end-clients. Contractors shouldn’t allow that approach to cost them 20-30% of their income unfairly.
It is important to remember that these new rules do not change how IR35 should be assessed nor do they supersede the 50 years of case law on employment vs self-employment. If our opinion was that you were outside of IR35 when we reviewed your contract, it is very likely that will still be the case now. Don’t allow your client to decide otherwise without following the process set out in the legislation.
Need a hand? We can help.
For all enquiries and questions, contact us. We will be happy to discuss your options in further detail.