Private sector IR35 / Off-Payroll reform - Essential FAQs

IR35 off payroll FAQ

Recently introduced IR35 reform in the private sector presented a host of challenges to contractors, along with the businesses that place and engage them. Here we have included some of the most common FAQs we get asked about these changes, which were rolled out on 6th April 2021.

Importantly, all of the information we have included here has been validated by renowned IR35 experts, Qdos.

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.

When a contractor is engaged by a medium or large private sector business, the end client is responsible for assessing IR35 status, with the fee-paying party (agency/end-client) liable for IR35 if all legal obligations have been met throughout the supply chain.

The 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, are 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’, carry the IR35 liability, assuming all legal obligations have been fulfilled throughout the supply chain.

This has also been the case in the public sector since 2017. It’s why recruiters are strongly advised to ensure that 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 IR35 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 such as Qdos, or several alternative methods.

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, along with the reasons that led to this particular decision.

The fee-payer should also be notified of the decision. If the role is inside IR35, then the fee-payer is responsible for deducting income tax and NICs from your earnings.

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 suggest you order a professional IR35 contract review, along with a thorough examination of your working practices. Given working practices often change, a status review is recommended every 6 months.

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.

To check client decisions and to support appeals, contractors often have their status reviewed by an independent expert.

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 employees’ 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 where the IR35 rules are illogical. 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 employment.

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 – otherwise known as ‘blanket determinations’ –without reference to the contractual terms or working practices 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.

In the lead up to and upon the roll out of private sector reform, reports of blanket determinations were also widespread. And while we understand that some of these have since been reversed – with more businesses choosing to engage contractors outside IR35 – there is still a lot of work to do to convince risk-averse companies that IR35 reform can be managed.

By this, we mean to educate businesses that blanket determinations (non-compliant) or contractor bans (which result in contractors being forced to work via umbrella companies where IR35 is not a consideration), are not the solution.

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 open?

Absolutely. While IR35 reform caused challenges for contractors, Qdos research conducted in November 2021 indicates an 83% rise in the number of contractors being placed outside since April 2021 and the roll out of the changes.

This is evidence in itself that operating outside IR35, via a limited company, is still a very popular and achievable way of working as a contractor.

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.

Private sector IR35 / Off-Payroll reform – Essential FAQs