With more than six months since the private sector off-payroll (IR35) reforms were implemented, we look at the impact on contractors and how they can work both inside and outside IR35 compliantly via a dual solution.
There can be no doubt that the reforms, which were applied to the private sector from April 2021 onwards, have meant that many individuals and companies have had to rethink their hiring strategies and policies.
We’ve already started to see the real impact of IR35 on the contracting industry, which has come with changes to the ways contractors are working, and ongoing confusion for some on what the rules mean for them.
Here, Clarke Bowles, Director of Strategic Sales at Parasol Group, highlights how to know whether you should be working inside or outside of IR35, and why many contractors are keeping their options open and choosing to do both.
What are the IR35 reforms?
Introduced to curb potential tax avoidance, IR35 is intended to differentiate between permanent or PAYE employees working for the same organisation day-in-day-out, and genuine contractors working on a range of different assignments, often covering one-off pieces of work.
The IR35 legislation is now more than 20 years old. It extends to all workers working through an intermediary and applies if a contractor works for an end client via an intermediary, who would otherwise be an employee or office holder of the end client if it weren’t for the third party involvement.
The reforms largely shift the liabilities and responsibilities, meaning that medium and large-sized private sector businesses hiring personal service company (PSCs) contractors are now responsible for determining the IR35 status of each assignment.
Contractors who are genuinely in business of their own account and receive an accurate and fair assessment can continue to work outside of IR35.
To be inside of IR35 means the working relationship is effectively one of disguised or ‘deemed employment’ and the contractor must pay employment duties of tax and National Insurance on their income.
Determining whether you’re inside or outside of IR35
Following the reforms, it’s now up to the end hirer (in most contractor cases, the client) to declare whether they view the assignment as being inside or outside of IR35. This requires looking at the written contracts between the parties and crucially, the actual working practices. When considering IR35 status, it is important to establish a hypothetical contract that reflects the true nature of the relationship between the worker and the end client.
To support end hirers in determining a contractor’s IR35 status, the government recommends using the CEST tool. This has since been found be flawed, with other government departments being let down by the tool and incurring tax bills from HMRC for incorrectly identifying IR35 status by using the tool. If in doubt, it’s always advisable to speak to a qualified professional on IR35 compliance.
Once the IR35 status decision is made, it should be detailed in a Status Determination Statement (SDS) – a document for all within the supply chain, that is supplied by the end hirer and removes their liabilities so long as reasonable care has been taken.
Secure an SDS and raise any queries quickly
In line with the new rules, the SDS should be provided to the contractor and the first party in the supply chain. There is no requirement for this to be signed, but the end hirer should retain proof that this was provided to both parties giving full transparency and allowing the fee payer to ensure the correct taxes are paid
As part of the reforms introduced on 6th April 2021, the submission of an SDS became a requirement. The provision offers increased protection to the end hirer as it lays out their status determination at the start or before the assignment. Once this has been issued, the responsibility for ensuring that the correct taxes are deducted and paid to HMRC. From here, tax liability is passed to the next party that receives this in the supply chain.
In addition, the SDS statement allows the contractor to understand the basis of the determination, which will help them, should they need to initiate the client-led disagreement process.
My advice to contractors in any doubt is that they need to quickly address any queries with their end hirers and, in my opinion, the SDS should always be completed.
Working inside and outside of IR35
An IR35 determination is based on individual assignments, and so contrary to assumption, contractors won’t necessarily have to work exclusively outside of IR35 or within it. Determining IR35 status is assignment-based, so while a contractor is working on one contract inside the rules, they could be working on another contract outside IR35 Consequently, we’re seeing many within the industry shift to a combination of limited company business and umbrella employment.
There are benefits in this for businesses and contractors alike. For businesses, the end-hirer won’t be at risk of being caught out on IR35, and for contractors, it offers a much easier route into many businesses at a time when there is still a lot of uncertainty and new assignments may be more difficult to come by.
The potential to work inside and outside IR35 means that dual solutions provide flexibility for contractors and freelancers. They have the option of continuing to work through their own limited companies when performing an outside IR35 assignment, but with the option to easily transfer to umbrella company employment if a specific contract requires it.
The security and benefits that come with umbrella employment have also been big draws for many self-employed individuals, but those that have come from a limited company background value the opportunity to keep their business open.
This is particularly important for contractors working on multiple assignments which have a different IR35 status, and therefore require different solutions.
The increased flexibility of a dual solution is something that has helped a lot of contractors at a crucial time, particularly as they navigate the new rules alongside the ongoing ramifications of the pandemic. It helps ensure costs are kept down and they don’t need to close down their limited company.
Always check for compliant umbrellas
The demand for umbrella employment within contractors is on the rise, but with this comes the unfortunate presence of tax avoidance schemes disguised as umbrella employers.
These fraudulent models will often reach out to contractors offering deals that are just too good to be true and end up leaving them with a big tax bill to pay.
When looking for an umbrella company, the first step should be to check their legitimacy with associations such as the FCSA or Professional Passport. This should give you some comfort that they have been audited against various standards, offering peace of mind that you are mitigating the risk of inadvertently entering into a tax avoidance scheme.
Often, recruitment agencies will have approved supplier lists in place; whilst this may limit choice it is a sensible move to ensure that they can minimise their own risk, as well as yours.
Six months since IR35 came in, contractors have every reason to be optimistic
The economy is starting to grow again and there are positive signs that contractors will continue to be vital in that recovery – as they always have been.
We must continue to educate both end-hirers and contractors on IR35 best practice, but I think we are starting to see the dust begin to settle on the transition, despite some ongoing court cases like the Professional Game Match Official’s Board vs HMRC having the potential to set new precedents for tax status.
Contractors are, by their very nature, savvy when it comes to getting the most out of their assignments, and it’s fantastic to see how they’ve adapted their working style and embraced flexibility to carry on working without IR35 becoming a major hurdle.
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