The vast majority of limited company contractors would have gone to work with a spring in their step when they heard the news that Chancellor of the Exchequer, Kwasi Kwarteng, had announced in his mini-budget of 23rd September that Chapter 10 ITEPA 2003 would be repealed.
Returning to Chapter 8 would allow contractors to regain control over their IR35 status. There was hope for those working in sectors where clients have been unwilling to engage with limited company contractors due to the potential tax liability, would be able to set up shop again.
However, significant economic unrest caused by the mini-budget led to the departure of the Chancellor of the Exchequer on 14th October. His successor as Chancellor, Jeremy Hunt, reversed most of the mini-budget, including the Chapter 10 repeal.
So, after four weeks of chaos, we’re back to square one. Chapter 10 stands.
While we await the Budget Statement on 17th November to confirm this with one hundred percent certainty (and considering the government’s recent lack of stability and reliability nothing is certain until it is certain!), we proceed on the basis that the status quo remains.
This will be disappointing to contractors who welcomed the Chapter 10 repeal. Understandably, this is a frustrating time for many as we are forced to navigate uncertain waters while the government attempts to calm the storm of the cost of living crisis.
What does the U-turn on the IR35 repeal mean for contractors?
For contractors working through a limited company, your end-client – if a medium or large-sized company – continues to be responsible for determining the IR35 status of the engagement. A Status Determination Statement (SDS) should be issued to you which provides a clear decision, explains their process in coming to their conclusion, as well as details of a disagreement process.
By law, you have the right to dispute the status determination and your client is obliged to respond within 45 days of receiving your complaint. Markel Tax can assist contractors with the drafting of a letter for the disagreement process.
The responsibility for determining status rests with the end-client as IR35 decision-maker and if your company is engaged directly with the end-client, your end-client is also the fee-payer, which is nothing more than the entity responsible for paying your company.
However, where your end-client contracts with any third parties they (e.g. any recruitment agencies), they are also obliged to pass on the SDS document to the agency below the end-client in the contractual chain.
That agency, or if there is more than one in the chain, the agency immediately above your company is then the fee-payer and will hold any tax liabilities should the IR35 decision be incorrect, and the end-client can demonstrate reasonable care in their decision-making.
End-clients unwilling to engage with the legislation may choose to employ people under PAYE or through an umbrella company. This is a commercial decision for the end-client based on their requirements and tolerance for risk.
What are the Chapter 10 exemptions?
If your end-client qualifies as a small company or is based wholly overseas, you will be subject to Chapter 8 rules. This means you, as the contractor, will be responsible for IR35 and will have the liability if HMRC can successfully argue IR35 applies. It’s important to remember that these exemptions are only in relation to the size of end-client, and not the agency.
For contractors whose end-client is exempt from considering the Chapter 10 legislation, you will need to demonstrate that you have considered the engagement from an IR35 perspective, with regard to the terms of contract and the working practices. Above all, you’ll need to demonstrate that you have taken reasonable care in doing so.
Even experienced contractors, who appreciate the key IR35 status factors and the nuances of some of the clauses, will seek clarity from independent specialist tax advice. Many contractors acknowledge that a contract review is a small price to pay to demonstrate reasonable care in their decision-making and save themselves from a penalty of 15%-30% on top of the tax due should HMRC’s arguments prevail.
Ensure correct IR35 decisions and protect your tax position
We continue to offer our contract review service, through the experts at Markel Tax, which allows you to determine your IR35 status with certainty. The review service enables you to align your contractual documentation to the working practices and strengthen clauses to ensure you remain compliant with IR35.
Where your limited company holds the liability, we are also able to offer our Survive35 TaxSafe tax losses insurance, which will cover your limited company in the event HMRC successfully argues the engagement should have been treated as “inside”. Tax losses insurance ensures your peace of mind that any tax, NICs, penalties and interest arising from an enquiry will be covered.
If you have any queries regarding IR35 or our insurance products, please get in touch.
Original article written by Nikola Nowak of Markel Tax