A look at those ‘inside IR35’ gigs which feel like ‘outside IR35’ gigs because there’s no ‘Control.’ Or much risk for the engager.
Since the introduction of the off-payroll working rules in the private sector on April 6th 2021, we’ve seen end-clients shy away from engaging limited company contractors, also referred to as Personal Service Companies (PSCs), writes Nikola Nowak, consultant at Markel Tax.
How most limited company workers are engaged today
Where they do engage PSCs, end-clients have shown a tendency to do so only on an ‘inside IR35’ basis.
In such instances, as tax and NICs are being deducted from the PSC’s income, there is very little IR35 risk for the end-client.
After all, HMRC is already collecting the maximum amount of tax possible!
Inside IR35 doesn’t absolve end-users of SDS or reasonable care
While there is technically no liability for the client to be concerned by, such ‘inside IR35’ treatment does not absolve the end-client of their obligation under the off-payroll working legislation to take “reasonable care” when deciding IR35 status.
Nor does it absolve the client of their obligation to provide the PSC contractor with a Status Determination Statement.
IR35 Lite: How some limited company workers are being engaged today
While none of the above may be ‘new’ to your understanding of the IR35-contractor landscape in the UK labour market, we have received unconfirmed reports of some instances where PSCs are being engaged on an ‘inside IR35’ basis, but when it comes to performing the services, there is a complete absence of control over the individual.
This way of working is being mooted by some as ‘IR35 Lite.’
Why ‘Control’ matters
As we know from case law precedent, ‘Control’ is one of the key ingredients of a contract of employment, along with personal service and mutuality of obligations.
We also know that a complete lack of control over the individual doing the work is inconsistent with employment.
It may seem on the face of it, then, that some clients are ‘incorrectly’ assuming the engagement falls ‘inside IR35,’ if the working practices suggest an outside IR35 position.
However, case law shows that the contractual rights have to be considered.
Why the Right of Control matters more
So while in practice the client may not exercise any control (or very little control over the contractor) in an IR35 Lite assignment, it is key to look at the terms of the contract.
Should the contract contain a provision stating that the client retains the ultimate ‘right of control,’ then this would weigh more heavily on IR35 status than whether or not the client chooses to exercise this right.
And most likely, if HMRC were to investigate, they would agree with the client’s determination — where such a contractual provision on the ‘right of control’ exists.
Yet if there is no right of control in practice, and no right of control within the contract either, then the client’s determination may be incorrect.
OPW legislation requires a client-led disagreement process to be in place
It is then open to the PSC contractor to challenge such a determination via the ‘client-led disagreement process,’ even though as the entity with the potential HMRC liabilities under the ‘OPW’ legislation, the client’s decision is final.
Theoretically, though, such an SDS would be invalid under current law as it is not reflective of the arrangements, and if HMRC were to investigate these ‘IR35 Lite’ assignments, they could disagree with the client.
The taxman isn’t likely to penalise end-users offering IR35 Lite
Again though, the maximum amount of tax and NICs has been collected and in addition, as there is no ‘tax loss’ to HMRC, it is difficult to envisage that a financial penalty would be imposed by the Revenue on those offering ‘IR35 Lite.’
As a PSC, and with an adviser’s input, it may be possible to argue that the contract is not reflective of the ‘true’ arrangements between the parties where the working practices reflect an ‘outside IR35’ position, but the written terms reflect an ‘inside IR35’ position.
Might HMRC deem your IR35 Lite engagement a sham?
Keep in mind, that the nature of the relationship between the parties can only be ascertained by looking at the written contract and the working practices together.
So in instances where the terms of the contract contradict the working relationship, the contract could be considered a “sham.”
In instances where the contract is not an accurate reflection of the working practices, the relationship could then be decided on the working practices alone.
But this would be a difficult argument to present and may not succeed — especially if the contractor has already accepted terms containing a right of control for the client (and if the rest of the contract is sound).
The Revenue isn’t hungry to probe inside IR35 determinations
While IR35 Lite is an interesting topic to consider in terms of the hypothetical issues that such assignments pose for the client, the reality is that HMRC’s appetite to pursue ‘inside IR35’ determinations is low-to-none.
So it is hard to imagine a scenario where HMRC would fight ‘the other corner’ and claim (in effect on the contractor’s behalf) that tax and NICs should not have been deducted!
IR35 Lite, seems like another unintended consequence of OPW legislation…
The best way to minimise HMRC-risk for clients is to ensure that a robust ‘due diligence’ process is in place. And unfortunately, risk-averse behaviour such as IR35 Lite only serves to suggest that the legislation is not working as intended.
If every end-client was to operate so over-cautiously as to place every engagement within IR35 — in an attempt to achieve ‘risk-free’ IT contracting — then it is likely that the professional freelancing would simply grind to a halt.
For now, it is down to contractors to utilise their right to undertake the disagreement process and try to put pressure on clients to re-look at their engagements if they feel the HMRC-friendly ‘label’ assigned to their role belies the working reality.
