HMRC are intending to introduce rules to combat a perceived non-compliance with the current IR35 legislation. HMRC are currently consulting on proposed reforms to the private sector, which will come into force from April 2020. The proposed legislation may have the potential to impact you when it is introduced next year.
HMRC estimate that a third of contractors who currently provide their services through their own company, should be operating IR35 on the income the company receives. However, HMRC estimate that only 10% of those companies who should be operating IR35 are presently doing so – this equates to a 90% non-compliance rate!
Given the high level of non-compliance, provided certain conditions are met, HMRC are shifting the onus for considering IR35 from the contractor’s company, and placing the obligation on the end client themselves.
Do the changes apply to my company?
Your company will need to be providing its service to an ‘end client’ (the ultimate user of your services) who themselves are considered to be a medium or large engager. This will be measured against the below tests, and considered met where two or more of the following apply:
Annual turnover of £10.2m or more
Balance sheet total of £5.1m or more
Employees of 50 or more
Where you are working for an end client which is part of a group, the end client will be considered to be medium or large if two or more of the following are met:
Aggregate group turnover of £10.2m or more net, or £12.2m or more gross
Aggregate group balance sheet of £5.1m or more net, or £6.1m or more gross
Aggregate group employees of 50 or more
For non-corporate entity end clients (partnerships and charities etc.), there are two proposals currently being consulted on by HMRC, either:
A business with 50 or more employees and turnover of £10.2m or more; or
Businesses with either 50 or more employees, or turnover of £10.2m or more
What happens if the rules apply?
The end client will be required to provide an IR35 opinion, using the usual employment status factors and looking at the engagement ‘in the round’, at the outset of your company’s engagement with them (or at April 2020, if the engagement is an existing engagement).
What happens if the end client decides my company is within IR35?
If the end client decides the engagement is within IR35, the next step depends on whether there is an intermediary between your company and the end client i.e. an agency.
If there is no agency, then the end client must withhold and pay over to HMRC the appropriate PAYE and employee national insurance from any payments it makes to your company as part of the engagement. In addition, the end client is liable to employer’s national insurance (and where applicable apprenticeship levy) due on the value of any payment they make to your company.
If there is an intermediary between your company and the end client, the end client inform the intermediary of the decision they’ve reached and it becomes the intermediaries’ responsibility to make the deductions from any payments it makes to your company.
I’ve had the contract with the end client reviewed previously and it says I’m outside of IR35, does this mean I’m not caught to the legislation change?
The change will still apply to you, if the above mentioned conditions apply. As a word of caution, a contract review only looks at half the picture. If the contract doesn’t reflect the reality of the engagement and the working practices the contractor is subject to, then HMRC will argue it is a sham, and it will not provide a suitable defence to any challenge from HMRC. Similarly, when the end client makes the decision, they will also need to look at the working practices to arrive at their decision.
I only work for a short period of time for each end client, does this mean that the IR35 legislation doesn’t apply to my company?
As mentioned above, when determining whether IR35 applies, there is a need to consider all the relevant employment status factors in the round. No one test will determine employment status, and therefore whether or not IR35 applies.
Length of engagement is often looked at by HMRC as a benchmark for deciding whether to challenge IR35, however it is a common misconception that there is de-minimus amount of time that services can be provided to an end client before there is a need to consider IR35. The fact that the proposed revisions require end clients to consider the application of IR35 at the outset of the engagement, reaffirms this point.
I’ve heard HMRC have an online tool I can use to consider IR35, but I’m concerned it’s biased to HMRC, should I rely on it?
HMRC’s online Check Employment Status for Tax (CEST) tool has been designed by HMRC to help both contractors and their end clients to consider IR35. We’re aware of comments that the tool is biased to HMRC and finding the contractor to be within IR35, but even if this is the case, it shouldn’t be dismissed in its entirety.
The CEST tool should be used as part of any consideration of IR35 for two reasons;
HMRC have said they will not challenge results produced by the tool, provided the questions have been answered accurately. This of course doesn’t mean HMRC won’t challenge whether the questions have been completed accurately, but provided HMRC accepts they have been, the CEST tool is the closest acceptance you can gain from HMRC agreeing the IR35 status of an engagement.
The tool may be biased towards a finding of an engagement being within IR35, but the same argument would be true of a HMRC inspector, so in essence the CEST tool will give you an indication of the likely stance a HMRC inspector would take if they were to review the engagement.
In short, the tool may be biased and as such should not be used in isolation when reviewing IR35, but as the above reasons demonstrate, it has its uses and should be used as part of the overall approach to reviewing IR35.
If all of the obligations sit with other parties in the contractual chain, what steps can I take now to ensure my company is ready for April 2020?
Our advice is to be pro-active, start having conversations with your end clients to make sure they are aware of the changes, and get a view from them on how they will be treating your company from April 2020.
If you disagree with the IR35 conclusion they are planning to reach, by being proactive and addressing this now, it gives you the opportunity to take independent advice on the IR35 position, which will hopefully help foster discussions with the end client to change their view ahead of the changes coming into force.
At Aventax, we are able to support you in obtaining independent advice on the IR35 position of your engagement. Our approach is to look at the entire engagement, including the working practices to arrive at an informed decision on the IR35 position.
In addition, should our review identify areas of concern in the contract, supporting documentation or the working practices, we can discuss with both yourself and the end client where changes could be made which would help demonstrate the contract were outside of IR35, without being detrimental to the commercial objectives of the engagement.
Can you give me an example, where you’ve been able to change the terms of the engagement to help a client fall on the right side of IR35?
We often see engagements where the end clients will want the ability to reject a substitute being sent in your place, with this reflected in the contract. Generally speaking, this can be indicative of a requirement for personal service, which in turn would help indicate the engagement was within IR35.
However, when Aventax probe the end client on this and ask why they wish to retain the ability to reject a substitute, it is often down to a concern that the substitute will not match up to the standards of the original contractor.
In this situation, Aventax have been able to get the parties to agree to amending the contract and working practices to allow the contractor to have complete autonomy to decide if they provide a substitute, provided that substitute has the same level of skill, experience and qualifications.
In addressing the end client concerns on standard of work, but at the same time giving the contractor autonomy over the use of substitutes, we’d managed to remove the inference of personal service and potential knock on implications for IR35.
I’ve looked at revising the engagement terms with the client and it’s a non-starter, what are my options?
This really depends on what your next steps are; do you see yourself continuing to act as a contractor; are you planning to take up an employed role with the end client; will you look to find new clients and engage on substantially different terms; are you at the point where retirement is looking like a good option.
Each of these options and any others you might be considering, the one thing to be certain of is that they will have ramifications for both you and your company, whether it by considering IR35, extracting cash built up in the company in the most tax efficient way, liquidating the business and bringing the company to a close.
At Aventax, we can help you make sense of the implications of your future plans in both a cost sensitive and tax efficient way.
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