After being postponed for a year because of the Covid-19 pandemic, the private sector is now on the home stretch regarding the IR35 legislation.
At Quanteam UK for instance, in order to comply with this new legislation, the past few months have been dedicated to conducting a complete review of our contractual documents, alongside partnering with clients and FCSA accredited umbrella companies.
Hence, whether these rules will apply closely or remotely to your professional situation, it is now or never the time to make sure that you fully understand what IR35 is about. The following will provide insight and overview on the topic.
IR35’s first piece of legislation has actually been in force since April 2000, being part of the Finance Act. It is now also used to describe two sets of tax legislation, the Off-Payroll Tax, recently introduced by the Government to combat tax avoidance, also confusingly referred as IR35.
This legislation aims to prevent disguised employment. Which means that workers supplying their services to clients via an intermediary (such as a limited company or Personal Service Company — PSC) would otherwise be considered as employees if the intermediary was not used.
These so-called “deemed employees” by Her Majesty’s Revenue and Customs (HMRC) would then, if their situation is ruled inside IR35, see the classic tax rules apply. Therefore, HMRC will expect the worker to pay the correct Income Tax and National Insurance Contributions.
Who decides if IR35 rules apply ?
It depends on who the end-client is. Initially the onus of proof remained on contractors. Then in 2017, the public sector saw a shift of this onus : they became responsible for deciding the worker’s assignment status. If the worker were deemed to be an employee, then the public sector would be responsible for paying the correct amount of taxes.
This shift in the burden is now about to be extended to the private sector from April 2021, which implies that end-clients will in turn be liable in the eyes of HMRC.
Before the delay caused by the pandemic, private sector companies had already begun to show their hand about how they were planning to approach the shift in responsibility that the reforms were due to usher in.
And for many in the banking industry, it meant introducing a blanket ban policy on the hiring of contractors operating via their PSCs. The consequence would be for contractors to directly become an employee, or to provide their services in future through a third-party umbrella company.
However, should assignments fall outside the scope of IR35, here is a non-exhaustive list of some key areas that will require careful attention, in order to mitigate the risk for a contractor to be deemed as an employee by HMRC :
Mutuality of obligations : is the end-client obliged to offer the contractor work outside of the initial project, and is the contractor obliged to accept it ?
If we take the example of a project-based contract that would fall outside the IR35, given that the work is specified, there should not be any obligation to perform other work during the course of the contract. Also, as the contractor is engaged for a specific purpose, once the initial project is delivered there should not be any obligation to perform further work.
Supervision, Direction and Control : does the end-client determine what the contractor has to do ; and how, when and where should the day-to-day work be completed ?
Following with the previous example, for a project deliverables and timeframes are all already agreed as part of the Work Statement. Hence, if little instructions may be required when the client gets onsite, the contractor would not be told ‘what’ to do. Neither on ‘how’ to do the work as the contractor has been selected for his expertise.
Substitution : is the contractor required to carry out the work himself, or can he assign it to someone else ?
Another clue that we are not facing an employer-employee relationship, is if it is demonstrated that end-clients does not need contractors to personally deliver the services, and that any individual with the relevant level of skills, qualifications, and experience would be able to deliver the services successfully.
Then the assignment would corroborate the idea that it is genuinely for the delivery of services and not for the provision of a specific person.
Besides these 3 key points, many other factors will help to assess if a contractor would be deemed as an employee, and thereby be considered as inside the scope of IR35.
It is thus easy to understand that the IR35 liability is arguably the most important question facing the UK’s contractor industry. The Government stated that these new IR35 rules will impact 170,000 consultants and 60,000 end-clients. It should also generate additional tax revenue of £3.1 billion between 2021 and 2025.
As Quanteam UK has already done during the previous months, many contractor relationships have been reviewed, in order to be ready for the 06th April 2021.