How to not fall foul of the new IR35 Rules

Conventional wisdom in the contracting world is for contractors to set up a personal service company or limited company before entering into any contract. This is to alleviate the worry of recruitment agencies, as they won’t be liable for unpaid taxes, and for the contractor to maximise their returns as well. This practice has helped grow the number of contractors in the UK, making them a significant proportion of the country’s workforce.

Since HMRC introduced the Intermediaries Legislation (more famously known as IR35) in 2000, however, there have been concerns over the law’s effects on the relationship between contractors and their clients.

New IR35 rules coming into effect in 2020 are set to change the landscape once again and in this guide we’re going to have a look at what these are and how your business can avoid falling foul of them.

What is IR35?

IR35 is legislation that seeks to identify the true nature of contractors' employment.

It assesses several factors, such as how much control clients have over the work contractors have to do, as well as from whom contractors get their equipment to accomplish their work. It only acknowledges the working conditions between contractors and the end-client, looking past whatever contract there might be with intermediaries like a recruitment agency or a limited company.

IR35’s purpose is to establish the tax status of contractors, determining if they should be taxed like a full-time employee or as self-employed professionals. HMRC intends to protect workers from being exploited by employers through contracts without having to provide benefits and support that are legally obligated to full-time employees.

It also prevents employees from simply leaving their full-time job, setting up a limited company, and continuing to do similar work with their employer while enjoying all the tax advantages of being self-employed.

Recent Changes in IR35

HMRC applied a change to IR35 in 2017 that made clients in the public sector responsible for assessing the tax status of contractors working for them. It also made agencies responsible for paying Income Tax and National Insurance Contributions should the contractors be assessed as falling within IR35.

In a study conducted by IPSE and CIPD, 51% of public sector hiring managers believed they lost contractors because of this change, and 71% found it difficult to keep contractors.

April 2020 Changes

HMRC will extend this rule to the private sector in April 2020 with the enactment of the Finance Bill 19-20.

This means employers that hire contractors, whether through an agency or a contractor’s limited company, will have to take on the duty of determining which of their contractors fall under IR35 and which don’t. For contractors that fall under IR35, their employers are required by law to manage the accounting and payment of these contractors’ Income Tax and NICs.

An employer or an “end-client” that directly benefits from a contractor’s labour will have to submit a Status Determination Statement (SDS) to their contractor. If applicable, they also have to submit an SDS to the agency involved in connecting the end-client to the contractor. The end-client is obligated to manage Income Tax and NICs until they submit this SDS to the relevant parties.

If there is a dispute regarding the SDS, the end-client is also responsible for reviewing and providing a reasoned response within 45 days. Failure to comply results in the end-client assuming IR35 liabilities.

The change coming in April 2020 will only apply to medium and large companies as well as recruitment agencies. Meanwhile, contractors working with small companies will still have to be responsible for their IR35 assessment.

For a company to qualify as a small company, they must meet at least two of the three conditions as defined by the Companies Act 2006:

  • Annual turnover should not exceed £10.2 million
  • The balance sheet total should not exceed £5.1 million
  • The average number of employees should not be more than 50

The 5% allowance given to limited companies to help meet the cost of complying with IR35 rules will also be withdrawn, except for those working with small companies.

The new rules will come into effect on 6 April 2020.

HMRC will not be pursuing investigations into the tax history of individuals who will start paying employment taxes for the first time once the law is updated. HMRC will also not be automatically launching enquiries into companies that start taking on the responsibility of assessing whether their contractors fall under IR35 or not.

What Decides Your IR35 Status

Unless you are planning to solely work with small companies, your tax status as a contractor will ultimately be out of your hands when the new IR35 rules apply.

However, that does not mean you are completely powerless. You can still negotiate the conditions you are willing to work with when dealing with a public sector organisation or a private company.

1. Supervision, Direction, and Control

The extent to which your work is supervised, how much guidance is given, and what parameters clients set factor heavily into your IR35 assessment.

As a contractor, you need to have as much autonomy in your work to not count as a full-time employee. Set your own hours, outline what services you will provide, and declare where the work will be done.

2. Mutuality of Obligation and Exclusivity

If you don’t want to fall under IR35, ensure the contract states you have no obligation to continue working with a client once you’ve accomplished your tasks and the client is not obligated to provide work. You should also not be prohibited from taking work from different clients.

3. Provision of Equipment

Contractors are responsible for their own equipment and shouldn’t rely on a client unless it’s for safety, security, or practicality.

4. Financial Risk

Being self-employed means not having the safety net of regular guaranteed work, and using your own money to run your business.

5. Payment Basis

You need to negotiate your own rates, send an invoice, and pay for your own expenses instead of agreeing to a regular hourly, weekly, or monthly rate.

6. Substitution

Contractors provide services, not their personal skillset, so you have the right to have a substitute perform the services in your stead.

7. Corporate Involvement

You cannot be part of your client’s corporate structure in any way. You should not be receiving benefits, be included in an internal list of workers, and have your own business card with a client’s name on it.

8. Right of Dismissal

Breaching the terms of your contract should be the only way for you to be dismissed. However, as a contractor, you are not entitled to a statutory notice of termination.

9. Intention

The professional relationship between a contractor and a client is “supplier and customer,” with the contractor supplying services to the client. While it is good to have this in writing, this relationship must be expressed in action.

Stay Updated on IR35

An upheaval in the contracting industry is about to come in 2020. Keep close attention to all the complexities of IR35 to ensure you are ready for the upcoming changes and avoid the costly stress of an enquiry into your tax history by HMRC.

If you need help understanding and staying compliant with IR35, leave us a message and one of our professional accountants will assist you.