IR35 The Countdown Begins
Welcome to Contractor Corner, the series written specifically by Qdos Contractor for accountants with clients who are contractors.
This blog is taken from the ICPA website. Dedicated to supporting and promoting the needs of the general practitioner. You can find us at www.icpa.org.uk or email [email protected] or by phone on 0800-074-2896.
Since IR35 was introduced almost two decades ago, its core aim has been to combat disguised employment; to target those individuals who, if it weren’t for their limited company, would be considered employees for tax purposes.
Despite numerous revisions to IR35, the Government have maintained that too many limited companies are still illegitimately working outside of IR35; this led to the ‘off payroll’ rules being applied to public sector contractors back in April 2017, and the roll-out to the private sector in just over a year’s time.
From April 2020, the responsibility for determining the IR35 status of contractors will fall on the medium and large private sector companies that engage them. Additionally, when a recruitment agency is involved in the process and handling the payments to contractors, it is likely they will carry the liability despite not being in charge of setting IR35 status.
With the IR35 consultation expected to be released this month confirming the Government’s plans for the reform, the overwhelming message coming from IR35 specialists is that all parties should get to work on understanding the changes immediately.
For most contractors, their first port of call in gaining some assistance with their IR35 status will be their accountant. Accountants with contractor clients should therefore ensure that they are competent and well-versed in the subject of IR35. Having some knowledge on the subject is crucial. For accountants who wish to refer their clients to an IR35 specialist, there are several like Qdos Contractor to assist not only with advice, but also IR35 training courses and contract review services for contractors, accountants, end client organisations, and employment businesses.
Until the reform comes into force in April 2020 it should be ‘business as usual’ for contractors operating in the private sector. Contractors should be performing their own due diligence in safeguarding their status by having their contracts checked regularly and ensuring their working practices fall outside of the legislation. It is advisable to speak with your client to establish their position with regards to the changes and verify what action they are taking to prepare.
As an engager, it has been predicted by many independent workers that private sector companies will make risk-averse IR35 decisions to protect their liability – something that continues to happen in the public sector. It would, however, be unwise for engagers to ignore the IR35 changes and assume that contractors will settle for a ‘blanket’ ruling of being placed inside without a fair assessment of their status. Not only could this run the risk of contractors increasing their rates to account for the significant cost of working inside IR35, but also the threat of leaving the contract altogether. This should make any engagers that might be preparing to place independent workers inside IR35 automatically reconsider if they want to continue working with them.
For many end clients, contractors who can be engaged on a flexible basis and who provide specialist services are an extremely valuable commodity. The time between now and April 2020 should be used wisely to ensure as little disruption as possible.
The importance of financial risk
A strong indication of self-employment can be the financial risk that the contractor is exposed to in running their business. Although not a conclusive test in isolation, individuals who risk their own money by, for example, buying assets, bearing their running costs or paying for overheads and materials, are more likely to be self-employed as employees do not usually need to risk their own capital.
When challenged with an IR35 investigation, often contractors can become embroiled in the process of evidencing the three key IR35 tests; substitution, control, and mutuality of obligation – meaning that the financial risk test can often be forgotten.
Ultimately, taking a financial risk would not always mean a contractor is deemed outside of IR35 as this is only one factor to be measured in the context of the overall picture and other factors must also be considered. Nevertheless, in the event HMRC were to enquire into a limited company and were undecided regarding the overall status, carrying a financial risk could ‘tip the scale’ towards a contract being considered one of genuine self-employment or otherwise.
Some examples of demonstrating financial risk are as detailed below:
Correcting faulty work: correcting any faults or omissions in the services provided is a fairly simple way for contractors to demonstrate an exposure to financial risk. This is often a contractual requirement that can easily be put into practice should any mistakes ever arise and is also a positive indication of being a genuine company operating in business on their own account.
Business insurance: holding business insurance is another way to show that you are in business on your own account. It helps determine that a contractor has acknowledged their financial risk exposure and has therefore taken the precaution to protect themselves against any claim that could lead to a financial loss against their company. This may also be a contractual requirement – where so, it is important that the insurance is purchased as this will help demonstrate that contractual terms are held true.
Provision of equipment: where a contractor provides important equipment that is essential to the services being provided, this is a very strong pointer to being in business on your own account – for example by providing your own vital IT software purchased at your own expense. A common misconception can be that the size of the equipment provided is of more relevance, however case law such as that of ECR Consulting, has shown the value in smaller trappings of a business such as stationery and websites in distinguishing a business from an employee for tax purposes.
Training: financial risk may also arise where a contractor incurs significant amounts of expenditure on training to provide themselves with a skill which is required for a particular engagement. Investing in training is a good pointer toward being a genuine business and “this can be treated as a pointer to self-employment if there is a real risk that the investment would not be recovered from income from future engagements” (ESM0541). Demonstrating that your business is highly skilled in providing the services by ensuring the development of knowledge and expertise is an important pointer toward self-employment that can help in supporting other key IR35 tests, such as control.
• Becci Walker, Senior Employment Status Consultant, Qdos Contractor