IR35 is tax legislation, established to reduce tax avoidance in workers who perform their duties under an intermediary such as a limited company, yet their relationship with their client is that of an employee.
The IR35 reform was implemented in the public sector in April 2017 and is set to roll out in the private sector in April 2020. Although this news was unwelcomed by a vast majority of the contracting community, the good news is there is plenty of time to prepare for the changes set to take place.
The crux of the reform is that the end client will now take on a new responsibility of determining whether a worker is inside or outside of IR35. The current rules associated with deciding if someone is inside or outside will remain the same. If a contractor was outside of IR35 before then, they should remain outside post 2020, and they have the right to contest otherwise.
When the same reform took place in the public sector, there was a high level of “blanket” inside IR35 decisions. It was argued that this was possible due to the standardised roles and responsibilities that are prevalent within the public sector.
The private sector is a different beast, so it is unlikely the same approach can be taken, however, to support this HMRC have commented that they will be taking action against clients if such practices were to happen. What this actually means, as with a lot of details regarding the reform, remains to be seen but this seems like positive commentary at least.
As a contractor, you will be paid a premium for working in an environment that can be concluded within 30 days’ notice. This premium is a crucial incentive for choosing this career path and means contractors are already on a better financial footing than their permanent colleagues.
This is the case even if you are inside IR35 and paying tax/NIC’s like a standard employee. However, as noted before, if you remain outside IR35 then you can continue as a self-employed worker with the increased financial benefits this brings. The key is to gather and record the right evidence to support your status as self-employed since you can expect it to be challenged by the end client, the fee payer (usually a recruitment agency) or HMRC.
There is no predetermined list of evidence to prove this status, but suggestions would be:
A right of substitution
- Clauses for this have been included in most engagement contracts for some time, but HMRC will disregard them unless you can realistically bring a replacement.
- If there are restrictions at your work site regarding security profiles and/or work equipment having to be provided by the client, you could consider entering into an arrangement with a contractor colleague who is working at the same site as yourself.
Supervision, direction and control
- Gather evidence that shows you have directed the business rather than the other way around
- Was a system or process adopted because of your input
- Gather evidence that the client operates different rules for a contractor and permanent personnel
- Are contractors subjected to enforced leave?
- Are contractors unable to attend certain events?
HMRC Check Employment Status for Tax (CEST)
- A CEST evaluation showing you are outside of IR35 will be very helpful in supporting your status, however using contrived answers to get the result you want will make it useless
So, while the legal environment for contractors is undoubtedly going to change, it doesn’t mean your earnings have to be negatively affected. If you continue to thrive on the financial benefits offered when contracting then now indeed is the right time to choose a contract job.
If you are not yet a contractor but are thinking about becoming one, download our free Contracting Guidebook 101: https://bit.ly/2RLhu2f
Our partner IF Payroll has contributed to this article.