The IR35 myth-buster: Answering contractors most asked questions
Changes to the off-payroll working rules – otherwise known as IR35 – are fast approaching for the private sector. From April 6th, responsibility for assessing the employment status of a contractor, for tax purposes, passes from the contractor to the end-hirer that engages them. The rule changes are still being met with confusion, however, with many still wondering how this complex legislation will impact their finances.
With this in mind, we would advise contractors to make sure that they have a solid understanding of their IR35 status both before and after this date. Matt Fryer, Head of Legal Services for Brookson Group recently met with HMRC for clarification on a number of key issues. Here he unravels some of the most common IR35 myths.
- HMRC will seek to recover backdated tax from all contractors working via PSCs which are found to be inside IR35 by their end hirer
Wrong. The new rules only apply to work conducted after 6th April 2020. If a contractor has previously worked via a PSC but is assessed to be inside IR35 by their end hirer under the new rules, the end hirer is responsible for deducting their taxes after this date. PSCs are still responsible for any taxes owed in the last 6 years prior to this date.HMRC has indicated that it will not actively seek to investigate contractors whose assessment has “changed”, as its priority will be to scrutinise end-hirers to ensure that they are correctly assessing contractors tax status under the new rules. However, it’s worth adding that random sample tests could still be made for contracts prior to April 6th.PSCs that have avoided their obligations under the old rules will still carry this risk. Genuinely self-employed contractors who have been working via PSCs, but who have been wrongly assessed as inside IR35 due to an end hirer taking a blanket approach, need not be concerned. We would advise contractors to discuss their assessments with their hirer or recruiter to ensure that reasonable care has being taken and that they fully understand why they have been found to be inside or outside IR35.
- If a contractor working via a PSC is assessed to be inside IR35 for a contract which started prior to 6th April, they should end that contract
Right. In this instance, end-hirers should ideally terminate existing contracts and issue new contracts which acknowledge the factors determining the employment status determination. Most clients and agencies will be terminating old contracts and issuing new ones. Contractors would be advised to ask for a new contract if this is not the case.
- Hirers are able to protect themselves by making blanket decisions on IR35 assessments
Wrong. Companies who think they have managed the tax risk by either performing “blanket assessments” and treating everyone as being inside IR35 without proper consideration, or those who have taken shortcuts in making assessments, are in fact exposing themselves to a significant balance sheet risk. Many believe that they have passed responsibility down the supply chain because they have assumed that the recruitment agency – or “fee payer” – is wholly responsible, but they have overlooked the fact that they may still be held responsible for deducting tax and NIC for any contractors who continue to work inside IR35 via their personal service company (PSC). It’s critically important that end-hirers undertake assessments taking the reasonable care required under the legislation.
- There is no way to challenge an ‘inside IR35’ decision
Wrong. Contractors have the right to challenge the result of an employment status assessment if they genuinely believe it to be inaccurate. With the new off-payroll rules, HMRC has indicated that it expects end clients to put in place a Client-led Status Disagreement Process. This means that contractors will need to lodge a challenge with their end hirer who has 45 days to respond. If the challenge is not successful but the contractor still believes that incorrect taxes have been withheld from the payment to their personal service company they can attempt to claim a tax refund from HMRC on their individual tax returns. The chances of success associated with such an attempt and whether this may lead to further scrutiny from HMRC into prior arrangements is yet to be seen. It should be noted that if the contractor ceases to work through their personal service company and works through the agency payroll or an umbrella company, this opportunity to reclaim taxes from HMRC is not available.
- Contractors can provide end hirers with their own determination of their tax status, saving the end hirer the time and cost of considering the assessment themselves.
Wrong. The legislation requires the end hirer to make the assessment. HMRC have indicated that an end hirer relying solely on a contractor’s IR35 status determination would not demonstrate reasonable care and would leave the end hirer liable.
- If a contractor is found to be inside IR35 for one client, it must mean they are working inside IR35 for every client
Wrong. Contractors’ IR35 status must be assessed on a separate, case by case basis and is completely dependent on how they engage with each individual firm. This means that while a contractor could be found to be working within IR35 for one client, the same contractor may also be working outside of IR35 for others.
- When a contractor is found to be inside IR35, going into PAYE is their only option
Wrong. Contractors can choose various paths following their IR35 assessment. They may, for example, choose to cease working with their end-hirer all together and focus solely on projects in which they will be found outside of IR35. If they wish to continue working in the same scope, they can continue operating directly via their PSC, if the end hirer deducts tax prior to payment, or they could look to work via an umbrella company. Contractors have free rein in terms of choosing who they work with, but we would advise that they seek support from their recruitment agency who should have an approved list of preferred umbrella companies in place, which ideally should be FCSA accredited.
- Contractors need to close their personal service company (PSC) in order to work through an umbrella company
Wrong. Every contract is different and closing a PSC can be costly and the process can take many months. We would advise contractors to take a more flexible approach, especially in the first few months following the private sector roll-out. This is because, following the public sector changes in 2017, we saw public sector bodies struggle to recruit the contractors into roles deemed inside of IR35. This meant that, in turn, some public sector bodies relaxed their bans on with limited companies and started to make proper IR35 assessments. While this is very much dependent on the industry they’re working in, if a contractor is unsure on whether to carry on working via their PSC we don’t see any harm in waiting until the dust settles after April.If, however, you are justifiably caught inside IR35, and have previously worked via a PSC, your role has not changed, and you are unlikely to be working on contracts outside of IR35 for the foreseeable future. We would then advise that you to consider closing the PSC.
- It is possible for contractors to be categorised as ‘inside IR35’ and still receive 80-90% take-home pay via an umbrella company
Wrong. Tax avoidance schemes posing as umbrella companies often offer ‘too good to be true’ levels of take-home pay. As with the Loan Charge, using one of these schemes could leave contractors, agencies and the end hirer liable, meaning they may need to pay back a significant amount in backdated tax. To avoid this from happening, we would always advise that contractors work with an umbrella company that is suitably qualified and experienced and has been accredited by a reputable body such as the FCSA.
- End hirers will not increase contractors’ rates in order to compensate them for the money lost to additional tax
Maybe. It’s definitely worth asking. Businesses risk losing skills and knowledge if they choose not to work with genuine contractors – which means it will come down to how much they value that contractor’s experience and expertise, and whether they could find someone who can do the same work, of the same standard, under PAYE. It is very much possible that some companies will be willing to pay more in order to retain the specialist knowledge and experience that their contractor workforce provides.