Independent employment tax adviser
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Five misunderstandings around IR35

16th Jul 2019
Independent employment tax adviser
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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.

Replies (8)

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By InterimAccountant
16th Jul 2019 13:01

The comment about there being no difference if you historically complied with the rules is not strictly correct. I have treated most of my contracts as being within IR35 but paid a high portion directly into my pension scheme reducing the Ers NI. Under the new rules I cannot do this and will loose out.

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By schocca
17th Jul 2019 10:50

In some senses, there is clarity - if the CEST tool says non-IR35 and the client also says "outside IR35" - then the PSC employed has a clear statement on their position.

Remember that we have never had this opportunity before.

So if you are marginal, then this is where QDOS comes in.

The real problems of course will be where the CEST tool differs from the client's view (either way).

Also the CEST tool does need to cater for mutuality of obligation. I'm starting to come to the view that if there is a clear "No MOO" in the contract, then it may be reasonable to take the view that the CEST tool should not be used (in it's current form) as there is NO employment situation to consider and it cannot give a correct answer for any of the inputs.
- I should also point out that without MOO in the CEST tool, there is a high probability that the CEST tool will be destroyed by countless tribunal rulings post April 2020.

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By tonyaustin
17th Jul 2019 11:43

An unbiased article talking accurately about IR35. It shows a common sense approach and corrects so much of the nonsense being put out by contractors regarding the new rules. After all, the new rules effectively do no more than reflect the PAYE regulations that have been in place for payments to individuals, probably for 70 years.

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By johnjenkins
17th Jul 2019 11:50

I have always said and I still maintain the view that if the "contract for services" is drawn up properly and adhered to, then it should withstand any challenge from HMRC. Don't forget IR35 is creative taxation.

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Replying to johnjenkins:
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By C Graham
17th Jul 2019 12:01

agree Johnjenkins - and the question arising regarding mutuality of obligation which exists in almost all contracts should simply ask if the contractor still works in his own interest, for his own gain and not solely for the benefit of the 'employer'.

And if the contractor cannot apply employment law to the terms of service then quite simply there is no employment because if it is not recognised in law as being employment, it is not employment.

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By dgilmour51
17th Jul 2019 12:30

"... these proposals are not around increasing the tax take.."
Excuse me for being a little sceptical about this manifestly HMRC propaganda phrase - they have ofttimes stated that the catalyst for these rules is to increase the tax take.

" ...but to introduce steps to ensure compliance with the rules..."
And change the rules as necessary to put people 'out of compliance' not only increasing the tax-take but also the opportunity for extra proxy tax in the form of fines - even worse, with a mendacious tendancy to retrospection.

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Replying to dgilmour51:
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By C Graham
17th Jul 2019 12:28

totally agree. and the irony of an organisation that invented the IR35 rules then finds they cannot even win cases trying to prove that an entity fell under 'disguised employment'. How much tax has been lost in fighting cases and being unsuccessful - would be a good FOI request.
What will happen to companies like Accenture and Capita I wonder. will their employees become employees of their contractors companies. Why go for PSC and yet the huge outsourcing companies are not under question!

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By AndyC555
24th Jul 2019 12:45

Surely there's sixth misunderstanding? When IR35 was introduced, the regulatory impact assessment had predicted £220m extra NIC and £80m extra income tax PER YEAR.

A FOI request revealed that between 2002/03 and 2007/08 IR 35 had raised £9.2m, a little short of the £1.5bn expected.

Another example of the government misunderstanding tax/NIC and its impact.

And the probability is that HMG had spent the £1.5bn it anticipated getting.

No wonder they are changing the rules. I wonder how much they expect to raise this time.

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