The forthcoming off-payroll changes to the private sector represent a massive challenge to the contracting industry. Here we have included some of the most common FAQs we’ve been asked about the IR35 reforms.
Importantly, all of the information we have included here has been validated by IR35 experts, Qdos.
The reforms are due to go live in April 2021 now, having been delayed from April 2020 due to COVID-19.
What is IR35?
The Intermediaries Legislation became law in 2000. It was introduced in response to the growth of what the government termed ‘disguised employment’ – particularly in the IT industry. By working via a limited company, a worker could pay less tax than a traditional employee performing exactly the same role. The IR35 rules apply to contracts which are performed in the manner of an employee rather than a self-employed person working in business on their own account. Although the tax benefit associated with working via a company has been eroded over the years, there is still a significant financial cost if your work is caught by IR35.
The IR35 legislation is governed by Chapter 8 Part 2 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA).
Off-payroll working – How has IR35 changed?
Importantly, IR35 itself has not changed. The way it is administered has. Currently, it is up to contractors working in the private sector to establish whether or not their contract work is subject to IR35. From April 2021 onwards, this obligation will fall to the end-client rather than the contractor. These off-payroll rules have already been applied to public sector roles since April 2017.
These ‘off-payroll’ additions are governed by Chapter 10 of the ITEPA.
Are all clients affected by the IR35 reforms?
All clients, aside from those classified as ‘small companies’, using the definition supplied by the Companies Act 2006, will be affected. You can find out more here.
Are recruitment agencies affected by the IR35 changes?
Yes. Recruitment agencies that handle payments to contractors, otherwise known as the ‘fee-payer’, will carry the IR35 liability when reform is enforced. This has also been the case in the public sector since 2017.
In simple terms, this means agencies carry the IR35 risk if all the other obligations in the supply chain have been met, which is why recruiters are advised to make sure a contractor’s IR35 status is set correctly.
How will the off-payroll rules work in reality?
Prior to your contract start date, the end-client must make an employment status decision on the role, using ‘reasonable care’. They may use the official CEST tool (which unfortunately has been shown to be deficient), an expert third party, or some other method. You should be presented with a status determination statement before starting work, which shows whether or not IR35 is deemed to apply to the contract or not. The fee-payer should also be notified of the decision. If the role is inside IR35, then the fee-payer will be responsible for deducting income tax and NICs from your earnings. The fee-payer will often by your recruitment agency, but may also be a PAYE umbrella provider
What is CEST?
CEST stands for ‘Check Employment Status for Tax.’ It’s HMRC’s controversial IR35 tool. CEST was released a month or so before public sector IR35 changes in 2017 and has been widely criticised for many reasons, such as; ignoring key aspects of the IR35 legislation and being dismissed in more than one IR35 case. You can find out more here.
For an accurate review of IR35 status, we advise you to order a professional IR35 contract review, along with a thorough examination of your working practices.
What if I disagree with an employment status decision?
If you don’t agree with a status determination, you can appeal via a client-led disagreement process (curiously, not an independent service). The client has 45 days to respond. They can either change the determination and provide a new statement or stand by their original decision with an explanation.
How will you be paid if you are caught by IR35?
In some cases, your client may only offer you the role if you become a traditional PAYE worker, or you may take up the contract and operate via a PAYE umbrella company.
If you take the role as a limited company contractor, your fee-payer / client will be responsible for making the appropriate deductions from your turnover. This includes income tax and employee’s NICs. They must also make deductions for employers’ NICs, and the Apprenticeship Levy.
Under the off-payroll changes, limited company contractors who are inside IR35 can no longer claim the 5% administration allowance, which has been in place since 2000.
If I’m deemed to be an ’employee’ for tax purposes, do I qualify for employment rights, e.g. holiday pay?
This is one of the most unfair aspects of IR35. If your contract is deemed to be caught by IR35, then you will be taxed as an ’employee’, but have none of the statutory employment rights associated with traditional workers.
What does ‘reasonable care’ mean?
Under the IR35 reforms, all parties in the contractual chain are obliged to take ‘reasonable care’ when making employment status determinations. Unfortunately, there is no clear definition of ‘reasonable care’, so the term is open to some interpretation. Clearly, if a status determination decision is made following careful examination of the contractor’s contract and working conditions, then this would demonstrate that care and effort has been made. However, making project-wide determinations (see below) without reference to each individual contract would not appear to demonstrate sufficient care.
What is a ‘blanket determination’?
Following the introduction of the off-payroll rules to public sector organisations from April 2017, a number of bodies decided to make ‘blanket’ IR35 determinations – stating that entire groups of contractors were ‘inside’ IR35, whether or not their working conditions and contracts would indicate such. This practice, which may appeal to companies who are risk-averse, may well be repeated in the private sector. Alternatively, as we have seen with some major banks (such as Barclays and Lloyds), some large businesses may prefer to not hire limited company contractors at all – and only employ IT experts on a PAYE basis.
What if I have several contracts with different end-clients?
IR35 applies to a contract, not a person. So, you may find that one of your contracts is deemed to fall under the IR35 rules, whereas another is not.
Is there any point in keeping my limited company after April 2021?
Particularly at this early stage, it may be premature to consider ditching your limited company – even if your current or next contract is likely to be caught by IR35. There is a lot of uncertainly about how the off-payroll rules will work in practice and you may have mixed contracts in the future (some caught, some outside IR35). The work Qdos is carrying out with private sector firms suggests tens of thousands of contractors will have their IR35 status assessed fairly.
Is there any way around the new rules?
No. We strongly advise contractors to avoid any type of ‘tax avoidance’ scheme, as you may well be forced to repay any unpaid tax, plus penalties in a future HMRC investigation.
What should clients do?
If you are a client/recruiter, see our dedicated advice here.
What steps should contractors take?
For steps you should take as a contractor, see our dedicated article here.