By now, you’ve probably heard about the delay to the private sector IR35 reform, also known as the off-payroll rules. This postponement means that contractors, recruiters, and end clients alike have until April 2021 to get their business in order, and the responsibility of setting employment status still sits firmly with you, the contractor, for another year. You may essentially have ‘bonus time’ but don’t relax too much.
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Preparation is key
It’s all about communicating. The more communication you have in your contractual chain the more you can alter your clients’ perspective of IR35 and thus potentially strengthen your status as a result.
With this in mind, it may be worth seeking a Confirmation of Arrangements. This document is signed by your client and is essentially a confirmation that they acknowledge and agree with your current IR35 status. A Confirmation of Arrangements document is an assurance that your end client is unlikely to change your status determination when it is their responsibility in April 2021.
Most importantly, educate yourself about how IR35 works and try and involve your client. Part of this step normally involves a fair amount of searching the internet and trawling through HMRC’s far-from-clear guidance sheets. However, we have collated a short guide to the basics of IR35 below.
Where do you stand with IR35?
IR35 is a very complex piece of legislation. It’s judged on a case by case basis so there aren’t many hard and fast rules as to exactly what could land you inside. For this reason, we always suggest that you seek an independent review of your engagement by a third party IR35 specialist. That said, it never hurts to have a basic understanding of what such a specialist would look for in your contract and working practices, so let’s jump into the three major status tests that are used to measure your employment status.
Substitution:
As a contractor, it’s important that you have the right to provide a substitute should you be unable to provide your services for part of an engagement. In essence, if you were ill and could not provide your services to your client, would you then be able to choose another person to provide the work in your absence? You don’t need a substitute lined up, you just need to prove that you have the right to use one if necessary. It's all about showing that your client does not require you to be there personally, but rather just needs the agreed services carrying out by anyone qualified.
If you have a problem with your sink, you don’t care whether it's Mario or Luigi who turns up as long as the sink gets fixed. In this example, there is no requirement for Mario to personally provide the services.
However, it is important to remember that your client has the right to veto any substitute you choose should that substitute lack the required skill or expertise. This is mainly to stop cheeky contractors pulling a fast one and hiring someone that has no idea what they’re doing on the cheap.
Mutuality of obligation:
We often refer to this one as MOO for the sake of simplicity. You could have problems with MOO if you are expected to accept another contract from your client, or if you expect your client to provide you with further work once the initial contract is over. Mutuality of obligation means there should be a distinct and mutual lack of obligation between the parties in the agreement. There should be no ongoing expectation to provide or accept work from either side.
Control:
The major status test of control is surprisingly simple. Your end client should have no right to control the way you provide your services - as a self-employed worker, you have the right to work whenever, wherever, however, and for whomever you choose. They should not supervise or direct you and you shouldn’t have a direct ‘manager’, so to speak.
Of course, specifications for the project and a detailed brief are necessary to fulfil your client’s expectations, but you should have the autonomy to provide services in the way you see fit as a specialist in your field.
It is important to note that these aren’t the only things that will impact your status. There's also a long list of minor status tests that could impact your overall inside/outside determination.
What help is available for contractors?
We may well see HMRC IR35 compliance activity ramped up in 2020/21 because of the fact that anticipated PAYE and NIC receipts arising out of the operation of the off-payroll rules will need to be recovered elsewhere. Contractors should, therefore, ensure they work with end-clients and recruiters to change their working practices, have tax fee protection or, even better, tax loss insurance in place for such an eventuality.
While CEST may be recommended by HMRC as the go-to toll for IR35 status determinations, there are other, more tailored options available that are just as valid. There’s an argument to opt for a ‘manual’ or ‘hybrid’ status review over an automatically generated determination; after all, no matter how thorough the questionnaire, the nuances of certain arrangements could be missed without a specialist to interpret the answers. It may take longer to receive your determination, but the results will be far more reliable. You also have direct access to the specialist that carried out the review, meaning that you can ask any questions you may have about the results and how they may affect you.
Andy Vessey is Head of Tax at Larsen Howie
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