With draft legislation now published for the government’s off-payroll working reforms, Alastair Kendrick tackles five of the most common areas of IR35 confusion for contractors and their accountants.
We now have the release of the draft revised IR35 legislation and confirmation from HM Treasury that it proposes to press forward with the introduction of the new rules from April 2020, despite the significant lobbying over issues such as the tightness of the deadline and lack of an accurate assessment tool.
The IR35 legislation is extremely complex and I have been involved with it since it was first introduced. I still see a lot of confusion and incorrect advice being given over the rules.
Here are five of the most common areas of misunderstanding I encounter from contractors and their accountants:
1) Can I simply set up an IR35-friendly contract to avoid the proposed arrangements?
It is important that any contract reflects the terms of the working relationship the personal service company holds with their end client.
In the past, we have seen people offered contracts which are said to be ‘IR35 friendly’ but if they do not mirror what is happening in practice they are worthless. For instance, putting a substitution clause into the agreement to avoid IR35, when substitution is not allowed in practice, is not going to work if the matter is the subject of review by HMRC.
On review, HMRC looks at substance over form. If you are in any doubt on this point, it is worth reading the Supreme Court ruling in the case of Autoclenz v Belcher.
Prior to April 2020, it is worth both personal service companies and the end client reviewing the written contract to see if this mirrors what happens in reality. If not, then action should be taken to correct this, so that when the CEST test is undertaken it is based on the actual working relationship.
2) If I have a number of different contracts then IR35 cannot arise
No. The rules require each contract to be looked at separately and a decision made whether IR35 applies to them individually. It may be that when the tax computation is prepared for your personal service company you will need to treat some of the income to be within, and some outside of IR35.
3) As HMRC has lost several high-profile IR35 cases at the tax tribunals, I have nothing to worry about
What the recent cases show is the complexity of the rules and how a decision can be made based on a particular clause within a contract. It would be foolish to assume that HMRC is always wrong in its approach. I am sure we will see more cases proceed through the courts and those judgments will give greater clarity to HMRC, advisers and judges in the first tier tribunal.
A lot of the recent decisions have been in regard to radio and TV presenters, and the judgment seems to hinge around the extent of control exercised upon them by the broadcaster. In my experience, there will be a considerable difference over the way a news or sports presenter will work compared to, say, someone doing a general radio show. A number of the cases which have recently been taken before tribunal are of presenters who fall in the latter category.
4) My accountant or agency has historically said my engagement is outside IR35, but that’s not what the CEST tool suggests. Is there a problem with it?
It is clear there are problems with the CEST tool. HMRC claims it is working on this and we are expecting an updated version later in 2019. Let us hope this revised CEST proves to be more robust.
However, just because there is a difference between historical advice and the CEST result, this does not necessarily mean the CEST is wrong. Sadly, this boils down to the complexity of the IR35 rules and given the lack of HMRC activity, this does not help to sort out these historical misunderstandings.
I am regularly approached by those who have incorrectly been told they are outside of IR35. I am sure we will see lots of occasions in the lead up to April 2020 when the end client is left trying to justify CEST results with a contractor, whose accountant or agency says the results are wrong.
5) Do these changes mean that engaging workers via a personal service company is going to cost the end client more?
This seems a misunderstanding. Clearly, if historically you have been considered outside of IR35 when in fact you are inside, then yes, this will impact on your take-home pay, but these proposals are not around increasing the tax take but to introduce steps to ensure compliance with the rules. So no, in real terms there should not be a difference if you have historically complied with the rules.
The proposals released in the finance bill put a responsibility on the end client for those caught by IR35 to account for employers’ class 1 NIC so that there is no advantage for those using a personal service company to being directly employed in tax terms. Therefore, those caught by IR35 may now feel it makes no sense continuing to work off-payroll and may look to be engaged from April 2020 in an employed capacity.
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Alastair is a leading expert on employment tax, IR35 and international fleet issues. He has considerable experience of all aspects of company car taxation. He is still heavily involved in issues relating to employee car ownership schemes and salary sacrifice.