Updated: Jul 12, 2019
As many of you know changes for IR35 affecting the private sector are to take place from April 2020. These changes, for the most part, have already taken place in the Public Sector with varying degrees of success.
So what is IR35?
The crux of IR35 centres around employment and whether or not you as a contractor/freelancer should or should not be on PAYE and therefore be considered an employee.
The basic model under IR35 is as below:
So the main question that IR35 ask is if the legal entities where ignored is 'Carrie' in this case acting as an employee? If yes the employee would go onto PAYE. Currently, this decision is in the hands of the employee or in the diagram the Agency.
What an outside IR35 contract looks like
In many cases, it is all in the contract, and it is worth reviewing and seeking out legal advice on current agreements and working to amend these before the new regulations come into play. The main factors that need to be looked at when it comes to IR35 are Control, Substitution, MOO (Mutuality of Obligations) and Financial risk.
Control - The control in terms of working times and work environment should sit with the contractor and not the End user. For example, if your contract says you should work 9-5 M-F, this would like found to be inside IR35
Substitution - This relates to in my example is 'Carrie Limited' would be able to substitute Carrie for an alternative. It is wise to have a substitution clause in your contract to stay outside IR35. It is also worth when taking up the contract agreeing who the substitute would be and having that in some form of correspondence - an email trail is enough in most cases.
Mutality of Obligations - Is your contract specific enough in what task you would be fulfilling.? Could your End User throw any duties at you? Assignments should be specific, and there should be little deviation from the functions in the contract. In the public sector, you will find most outside IR35 work is non BAU (Business as usual work and contractors are explicitly asked not to get involved with this). Besides, it should be clear from the contract that you as the contractor are free to take on other clients and this client would not have a mutually exclusive relationship with you.
Financial Risk - Ideally to be most IR35 proof milestones and specific fees for those milestones when met should be set in the contract. Any mistakes or rectifications in the contractors work should be carried out in the contractors own time for which they should not be compensated.
Whilst those are not the only factors that should be taken into account with an IR35 proof contract these are the main factors.
HMRC have advised companies that will come under the new ruling to start getting system in place over the next year to cover the new legislation. This will likely mean that contracts currently in place or coming into place over the next year will be look at with a view to April 2020 legislation.
So which businesses are affected by the change in law?
Not all businesses will have to adhere to these new changes. HMRC has put specific criterion in place so that 'small businesses' would be exempt from the change if they meet two or more of the following conditions:
1. Turnover under 10.2 million
2. Balance sheet total of not more than £5.1 million
3. Less than 50 employees (on average)
The new ruling does not apply to businesses that fall out-with this category however they will need to stick with the current criteria.
Businesses considered non corporates i.e charities will also not be affected by the changes yet.
What is changing and why?
For HMRC the current ruling that has been around for 20 years was problematic for a couple of reasons. If an assignment was caught inside IR35 then the affect would be a reduction in turnover of 5%, balance net of pension netted down for Ers Nic, taxed as payroll by agency.
When HMRC where taking disputes to tribunal they were losing 50% of cases as a result of that there was little enforcement on the contractor. In addition both contractor and End user are better off with the outside IR35 situation. There was no penalty to End users if the contractor got the IR35 status wrong. All in all everyone benefited from IR35 but HMRC.
What are the main changes and how might it affect you?
The main change is in who is liable to make the decision of inside or outside IR35 this would now sit with the End User as opposed to contractor. The process when contracting changes, in that the status of the contract has to be declared as inside or outside of IR35 before the first payment is made. This status should be cascaded down and in most cases the agency has responsibility to inform the contractor of the status.
An important feature of the new change is the liability for unpaid NIC and tax. HMRC will look at where the failure to comply sits. ie In my model the likelihood is that it would either sit with the End user or the Agency (if they have failed to follow the End users direction).
What was the impact in the public sector?
As most of the IR35 rulings have been in the sphere of the public sector since 2017 there has been lessons learned and the effects on contractors can give us insight into what might happen. The public sector as a whole was not ready for the changes and a lot of contractors got forced into inside IR35 roles from blanket style assessments.
IR35 is complex and I have deliberately for this guide tried to keep to the main points and not go too technical. The finer details surrounding the new rulings are still being finalised so it might be the new information comes to light before the legislation is in effect. The main things to do to protect yourself is to look at your contract, ensure that you do meet the guidelines and be aware that the End user will likely be running their own contract review.
From my own experience with the changes in the Public sector I do believe that this will change the face of contracting. It will in out opinion be likely that a high volume of contractors find themselves inside IR35 with an End user fearing liability.
We hope you have found this information useful, however if you do need professional advice on IR35 or other matters, do not hesitate to contact us on firstname.lastname@example.org