On April 6th 2021, the contractor’s worst scenario will become reality… IR35 in the private sector will finally go live.
The damage, confusion, unease, and in some cases the kneejerk reactions it has caused, have already wreaked havoc in the private sector over the past 12 months and could continue to do so for some time to come.
IR35 is going ahead, make sure you’re ready!
IR35 was introduced to recoup tax revenues from contractors perceived to be working as ‘disguised employees’ and paying less tax than they should as a result.
A ‘disguised employee’ is a contractor typically working through a limited company intermediary, who meets the tests of employment and, if it were not for their limited company, would otherwise be employed by their client1. The key employment indicators involve assessing whether the contractor is obliged to provide their personal service or have a right of substitution; whether the end client has a right of control over how the services are provided, mutuality of obligation (an expectation that work will be offered and accepted), and the working practices of the engagement.
The legislation also allegedly aims to create a level playing field in the workforce, so two people with the same skills, working on the same projects are paid equally, rather than the employee taking home his/her salary while the contractor takes home (on the surface) significantly more pay.
What it may not level-up is the lack of benefits that a contractor has access to in relation to his/her employed counterpart, such as holiday pay, sickness benefit, employer pension, and other perks, all of
But when an engagement is deemed to be inside of IR35 after 6th April, thousands of contractors may be a lot worse off if they are now taxed as employees, but still don’t have the employment benefits. A point that appears to have been swept under the carpet during the push to roll-out private sector IR35 and potentially increase tax revenues for the Treasury to the tune of £1.3bn per annum by 2023-242.
Regardless of what is written and what online campaigns are run to petition IR35 being scrapped, everything points to it going ahead, and organisations and contractors need to make sure they are ready for it.
Could the reclassification of an organisation’s contractors open a can of worms?
Organisations looking to reclassify their contractors as employees might be making the matter more complicated.
Whilst reclassification may appear to make life easier for the end-client in the short-term by reducing the admin burden, it could be viewed as potentially being short-sighted, as they could lose out on the best contractor talent to competitors who are operating a fairer IR35 assessment process.
What can be done to lessen the impact and make private sector IR35 easier for everyone?
a) Organisations can examine their contractor workforce and gather the required information to make their IR35 decisions now. While you do not have to issue a formal Status Determination Statement (SDS) before 6 April 2021, if you choose to do so, then it will be valid from 6 April 20213.
Issuing a SDS requires knowledge of the fundamentals of IR35, otherwise you could quickly all foul of the new legislation. Markel Tax can help with expert IR35 advice, call 0345 223 2727 or contact IR35@markel.com to make an appointment to speak to one of their experts.
b) Examine all contracts in your supply chain. If the engagement is direct, this will only be one contract between your business and the contractor’s company. If there is an agency in the chain, then the agreements between agency and you as the end-client (the “Upper contract”) as well as between agency and the contractor’s company (the “lower contract”) must also be considered3.
Two key points that must be considered when dealing with contracts:
- Written contracts are fundamental to IR35 status.
Contracts are written declarations by the relevant parties in the chain as to the rights and obligations which exist within an engagement. HMRC will scrutinise the written contracts and for the courts, the starting point in any IR35 Tribunal is to examine the written contracts in detail.
- Wording in the contract is critical.
In the event of an HMRC enquiry (or Tribunal Hearing), the wording of relevant clauses will be scrutinised carefully.
- c) Review your working practices. What is written into a contract does not always translate into real-world business practice on a day-to-day basis. Both the end client and the contractor need to review working practices via a ‘working practices questionnaire’ and discuss any relevant changes that need to be made to ensure IR35 compliance and that working practices reflect what is written in the contract3.
- d) Seek expert IR35 advice and insurance cover.
Caunce O’Hara offer a range of business insurance solutions to help contractors stay protected including Tax Enquiry & Legal Expenses Insurance, which provides cover for costs incurred by a HMRC investigation.
Markel Tax offer expert IR35 tax services and can help your business ensure it is compliant with the legislation. To speak to one of their experts please contact 0345 223 2727.