Ask The Experts

Q – How can IR35 apply to international companies?

A – HMRC would have no jurisdiction over a purely international company (with no UK connection) so IR35 does not apply to them. However, if the international company had a UK connection via a permanent establishment (either directly or via a group of companies that the international company is part of) then HMRC can seek to recover the liability from the UK branch of the international client.

Q – I am in process of closing a contract with Germany based FMCG company. They have a branch office in the UK as well. I have been asking for an Status Determination Statement (SDS) but the German recruitment agency and Client do not have a clue and they are reluctant to involve the UK office into the mix. Do I need to worry from an SDS perspective as at the end of the day, it is the client responsibility and HMRC will be after their UK office without impacting me?

A – If your end client is a medium/large-sized business, then it is duty-bound to issue you with an SDS by virtue of the fact they have a UK permanent establishment, i.e. a branch. You have done all you can to secure the SDS and you should keep a permanent record of your requests. The German company may be reluctant to involve the UK branch but should HMRC deem your engagement ‘inside’ IR35 then the UK branch will very much become involved and the end client will be held responsible for payment of the resultant PAYE tax and NIC arrears.

Q – If a client refuses to see that you are outside IR35, even when you can prove it beyond doubt, what can you do other than not work for them?

A – If the status disagreement process has been exhausted, then when it comes to completing your 2022 Self-Assessment Tax Return you can treat the earnings from your end client as being ‘outside’ IR35 and apply for a refund of the PAYE tax suffered. At the same time, you will need to provide an explanation in the white space information box as to why you have done this and the reasons you believe you should not have been placed within the off-payroll rules. Separately, you will need to write to HMRC after 5th April 2022 to apply for a refund of the employee’s NIC paid, again explaining why you believe you have overpaid NIC.

If you want to take more immediate action then you could contact HMRC via your Personal Tax Account or the helpline for individuals and employees to tell them why your tax code is wrong.

Both these actions will trigger an HMRC enquiry into your claim and this is where you will need compelling evidence if HMRC are to agree with your conclusion as, in general, HMRC will place greater emphasis on the end client’s evidence.

Q – If I believe that my client has determined inside IR35 status incorrectly, can I still argue this with HMRC and ask for a tax return?

A – Since 6 April 2021, your end client has been duty-bound to consider your representations and respond within 45 days. However, if, after appeal, they still believe you are ‘inside’ IR35 but you still disagree then you can effectively appeal via your Self-Assessment tax return (SATR). On the employment page of your SATR you will have to show ‘nil’ income but still enter the PAYE tax suffered. On the white space information box, you will have to inform HMRC of the reason for showing ‘nil’ gross pay and that you are in disagreement with the end client’s status determination. This will then create an overpayment of tax. There is also a knock-on effect on the preparation of your company accounts and C.T tax return. If you have not registered for Self-Assessment, then you will need to do so to enable you to file a 2022 tax return.

With regard to the NIC, you will have to write to HMRC and claim a refund soon after the tax year you’re claiming for.

Both these actions will trigger an IR35 enquiry and this is where the difficulties will arise. HMRC will set great store on the end client evidence, and your end client is likely to stick to their guns, so effectively you are taking on both these parties. While this is not an impossible task, your evidence for arguing an ‘outside’ IR35 determination is going to have to be strong and compelling. It could be that some of your evidence is personal but persuasive, e.g., business on own account factors, that the end client refused to listen to, in which case they could be guilty of failing to take reasonable care.

Q – If a contractor is assessed as inside IR35 but they disagree – but then client disagreement process still states they are inside IR35 –
a) how can a contractor further dispute this (legally/direct with HMRC etc.) and, if they were found to have been assessed incorrectly,
b) who would be liable to pay back the taxes they’d paid?
Would they go direct to HMRC or to the client?

A – Realistically, outside of the client-led dispute process, the only option a contractor has to try and overturn a decision is what could be referred to as a rather nuclear option . You could invite HMRC to enquire against you as you believe your status does not match that given. This option will be fairly unpalatable for most contractors because it could end up being expensive in legal costs and also would likely end up being a bit of a headache to manage, but it is within your rights to do so.

Q – I am planning to engage with an organisation that falls within the definition of ‘small company’, so it is my responsibility to determine the IR35 status. My questions are:
1) Are there any points specifically to be considered when contracting with small businesses?
2) Is there any risk in contracting directly with end clients?
3) What document can be used to confirm the size of the business?

A – You are responsible for self-assessing your IR35 status by considering all the necessary tests of employment status. Regardless of the size of your end client’s organisation, the same principles apply to each of these tests. Contracting directly with the end client may actually be more beneficial as there will only be one contract in place between the parties, so each party can be clear on the contractual and working arrangements.

Please refer to HMRC guidance ESM10011B which provides a suggested template for an end client to confirm its size.

Q – Is HMRC’s CEST tool pointless and/or counter-productive when it comes to determining a clear outcome, due to the subjective nature of the input it requires?

A – In theory, if the information going into the tool is accurate, the outcome can be relied upon – HMRC have said this themselves. But the problem is, as you’ve identified, the interpretation of the questions and answers can be subjective. Ultimately, the only way to get a genuine status determination is if a Status Assessor looks at all the facts in your engagement and comes to a conclusion (or a tax tribunal, should it get to that point). Everything else, HMRC’s CEST tool included, is simply giving a ‘best guess’ based on the information presented. Third party tools (such as ours) have the advantage of having a human element sitting behind it to provide reasoned questions/responses in the event that a result is not clear-cut. I would, however, never say HMRC’s tool is pointless – it does provide a good starting point for understanding status, but I would not use it in isolation.

Q – If your end client has issued a Status Determination Statement saying you are outside IR35 based on the CEST tool (and have not sought the advice of a third party such as the Kingsbridge IR35 Status Tool), is this something you can rely upon post-April 2021? Or would you recommend the end client should undertake a separate assessment to be sure? It’s worth noting that my contract has also been given a pass as outside IR35 by a third-party tax specialist.

A- The onus is on your end client to take ‘reasonable care’ when making the status determination and issuing the SDS. Providing they have done this and have answered the CEST questions accurately, then HMRC will stand by the result of its own tool. If you, therefore, concur with the determination, I see no reason for you to seek any further opinion as it is not your responsibility and you hold no liability.

Q – What is the reason you are not recommending CEST for status determination?

A – There are a number of good reasons why CEST isn’t recommended, but in our mind first and foremost would be the fact that CEST in 21% of all determinations between 25 November 2019 and 31 August 2021 gave an ‘undetermined’ result. This result is rather unhelpful as it gives little to no advice as to the next steps to take. Another good reason would be the fact that HMRC pays scant regard to one of the key status tests (known as Mutuality of Obligations) as they believe it exists in every engagement, even though this understanding has been refuted in numerous instances of case law.

Q – If a contractor has right of substitution in their contract and the client has the right (depending on the project status and milestones at the point of being offered a substitute) to either accept or reject, would that automatically put the contractor inside IR35? I have clients that have said they will accept a substitute if it is warranted, but would reject if they are in no rush to complete the deliverable.

A – Where an end client can reject a substitute for any reason whatsoever, then this diminishes the right of substitution and may mean that the reality is the worker has to provide the services personally, and therefore that the right of substitution is not genuine. However, personal service is only one of a number of employment status tests, albeit a most important one, that have to be examined when considering a worker’s IR35 status. There may be other persuasive factors that point towards self-employment. It is necessary to consider all factors and not just focus on one test in isolation when determining a contactor’s employment status. A good example is the Upper Tribunal’s recent decision in HMRC v Atholl House Productions Ltd. In that case, Kaye Adams, a journalist and broadcaster, failed the three key tests of status, i.e., right of control, personal service and mutuality of obligation, yet was still able to be deemed ‘outside’ IR35 by virtue of the fact that she was running a genuine business.

Q – Right of substitution: It would appear this is key and if we use the CEST tool, say no responsibility for customer staff, with right to substitute then our contractor is outside IR35. Is it that simple and what is the actual definition of right to substitute, can they interview, etc.?

A – Where a worker has a wholly unqualified right to provide a substitute, this will be a strong indicator of self-employment and may even be determinative by itself. By this, I mean that the worker could send a substitute of their choice at any time to carry out the work provided they remain responsible for paying the replacement worker. An end client can have a right to veto the chosen substitute and this will not dilute the right of substitution provided that right of veto only extends to ensuring that the substitute possesses the necessary skills, qualifications and experience to carry out the work. An end client who can reject a substitute for any reason whatsoever will diminish the right of substitution and lessen its influence on the employment status of the worker.

Q – In terms of right of substitution, is it sufficient for an agency to provide a substitute where the contract is between client and agency?

A – No. A substitute needs to be sourced, paid for, and provided by the contractor, and the substitute’s payment should come through the original contractor’s company. It is however reasonable for a contractor to engage an agency to source them someone to provide the services, but the fees for that should be covered by the contractor, and the agency will only be placing a substitute into the contractor, not the client. Simply put, there should be no disruption to the contractual chain for it to be genuine substitution.

Q – Is right of substitution critical to being outside IR35? What if you are a single contractor, but you have multiple clients?

A – It’s not critical, but depending on who you ask, a lack of personal services (most often demonstrated by substitution) is considered the ‘silver bullet’ or ‘first amongst equals’ of the key status tests. You need to consider control and mutuality of obligations too, otherwise you won’t have a clear picture – and that doesn’t even factor in the minor status tests. Being a one-man-band style contractor with multiple clients will be positive, but ultimately not a major indicator, as IR35 status is determined on a contract-by-contract basis. You could for example have five clients, whereby one of your engagements is inside due to the way you operate, but the rest are outside.

Q – My job is pretty specialised and I can’t provide a substitute. That works against me. All jobs have been inside IR35. Any suggestions?

A – Substitution is but one facet of IR35. Whilst not being able to provide a substitute would count against you for the purposes of determining your status, it is not the be-all and end-all of IR35. There are other aspects of personal service which could help (being able to subcontract for example) and there are two other key status tests (Control, Mutuality of Obligations) and a whole range of minor status tests that should be considered before a determination is made. If the client is basing your status purely on substitution, then there is the potential that they are not taking reasonable care in their determinations, which in turn could land your client in hot water for IR35 purposes (See ESM10014 for more details).

To take the substitution point further, it is perhaps worth pointing out that whilst specialism in an industry does make substitution more tricky, it is unlikely to make it impossible – remember that it is the hypothetical right to substitution that is what is looked for – not whether you have someone available here and now. Hypothetically, if you did have someone with the right skills, knowledge, experience to do the job and you presented that individual to the client, do you think the client would be willing to accept them or not? If they would, then you have a right to substitute.