IR35 – Are the IR35 rules changing?
What is IR35?
The IR35 legislation was created with the intention to prevent individuals, wrongly claiming to be self-employed, from opening their own Limited Companies in order to avoid tax. The IR35 rules allow HMRC to ensure that individuals are receiving the appropriate tax treatment. Currently, HMRC predict that there is over a billion pounds of tax avoidance due to non-compliance with the legislation. For this reason, HMRC are looking to change the IR35 rules in the private sector ad in particular where responsibility for IR35 compliance sits in the supply chain.
IR35 changes confirmed
The 2018 Autumn Budget announced that the IR35 changes implemented in the Public Sector in April 2017, would be executed in the Private Sector in April 2020. So, what are the IR35 changes? Currently, it is the responsibility of the director of the Limited Company to ensure compliance with the IR35 legislation. However, on the 6th April 2020, it will become the responsibility of the end hirer to determine whether the services conducted fall inside or outside of IR35. It is important to note that this will only apply to medium and large businesses – not small businesses. The Companies Act 2006 defines a small business as: 50 employees or less; a turnover less than £10.2 million and a balance sheet less than £5.1 million. It is anticipated that this definition will be used for the purposes of the IR35 changes. Furthermore, it is not HMRC’s intention to apply the changes retrospectively, but there has been no formal statement to solidify this notion. Finally, end hirers must take “reasonable care” when making their determinations of whether an independent contractor is inside or outside the scope of IR35. Despite the fact it remains unclear on what constitutes reasonable care, it is comforting that the government intends to include consequences for organisations that adopt blanket bans.
Despite the forthcoming changes in April 2020, the rules for determining employment status remain the same. As a result, the way IR35 is assessed will not be changing. HMRC will review the contract for services in place and will investigate day-to-day working practices in accordance to the same guidelines.
Primary IR35 rules
HMRC will consider all aspects of an assignment to ensure compliance with the legislation. However, what are the three key principal IR35 rules which aid HMRC in determining the employment status of an individual?
Firstly, HMRC will look to see whether the contractor is required to provide a personal services or if they can provide a substitute to carry out the services. This is the strongest way a contractor can ensure that they have not become a disguised employee of the end hirer. Providing a substitute will allow the contractor to prove that there isn’t an obligation to provide a personal service, as this is something more akin to an employment relationship. The end hirer has engaged with the Limited Company and not the contractor themselves. As long as any substitute has the same knowledge, skills and experience as the contractor, the Limited Company should have a fundamental right to send whichever contractor it sees fit to carry out the services.
Another significant indicator of IR35 is control. HMRC will investigate the degree of flexibility an independent contractor has over the services. An independent contractor should be engaged to carry out specialist services that the end hirer’s employees are unable to carryout. This is also why it is expected that independent contractors are paid a more premium price for their expertise. HMRC would therefore expect the contractor to have considerable autonomy over how, when and where they perform the services. For example, the contractor should be able to determine how many hours they conduct their services for, hence have control over their own start and finish times. This is a stark contrast to an employee who is normally controlled, supervised and directed.
Mutuality of Obligation is also an imperative factor that HMRC will consider. Mutuality of Obligation means that the end hirer is obligated to provide the contractor with work on an ongoing basis, and the contractor is obligated to keep accepting this said work. This is indicative of an employment relationship, hence should be avoided. The ideal scenario for an independent contractor is to be on a specific project that has clear deliverables from the outset. As a result, there will be an end date for the services. This will allow the contractor to ensure that they are being retained for a specialised purpose, opposed to picking up ad-hoc work here and there as an employee would.
If you are a limited company contractor, it would be beneficial to seek an independent review now. As the way IR35 is assessed will remain unaffected by the April 2020 changes, a review by Brookson Legal Services would provide invaluable education to the contractor, agency and the end hirer. The Contractor would gain increased knowledge of the IR35 legislation which may influence the consideration of future contracts. Additionally, if the role of the contractor was determined to be incompatible with the IR35 rules, the end hirer could develop a programme of change and implement a timeline before the April 2020 changes come in to force.
If you are a hirer or recruiter and want to prepare for the IR35 changes in the upcoming Private Sector, contact Brookson Legal today to find out how we can support you.