The IR35 reforms are here! What now?
After being delayed by a year due to the ongoing coronavirus pandemic, on the 6th April 2021 the off-payroll legislation reform came into effect for the private sector. Despite murmurs of a further delay to the reform, the legislation came in as planned; with little fanfare, arguably the biggest change for contractors, recruiters and agencies working practices is here.
Read on for an overview of the changes to the IR35 legislation, what contractors should anticipate now the reforms are here, and how contractors can expect to be assessed for IR35.
What has changed with IR35?
Now that the IR35 reforms are here, the liability for your IR35 status has shifted from you, the contractor, to your fee-payer. Your end client will be responsible for determining your IR35 status, and it will then be up to the fee-payer, whether this is your recruiter, agent, or end-client, to deduct the necessary taxes if you are deemed as inside IR35. This has already been the case for public sector clients since 2017, and now that the private sector reform has come into effect, it will be the case for all contractors except if your client is a small business. If your client is a small business, then the IR35 liability would remain with you as the contractor.
HMRC’s definition of a small business is that at least two of the following must apply:
- a turnover of £10.2 million or less;
- £5.1 million or less on its balance sheet;
- 50 employees or less.
HMRC also announced that were would be a soft landing to the reforms. This means that for the first 12 months, there will not be any penalties applied for genuine mistakes, unless there is evidence of deliberate non-compliance. Any tax debts found owing in a tribunal will still have to be paid however – a common misinterpretation of this soft landing.
What should contractors expect now the IR35 reforms are here?
Contractors should expect to receive a Status Determination Statement (SDS) from their client, which will provide an inside or outside status determination and outline the reasons for the result. Once the client has produced the SDS, the client will remain liable until they pass it on to the contractor and agency that they have the contract with. This agency will then be responsible to pass it down until it reaches the fee-payer.
In the event of an inside determination, your fee-payer will be responsible for taxing you at source. Therefore, income tax and employee’s NICs will be deducted from your pay and you will be taxed as if you are an employee of the company.
It’s worth noting that if you are unhappy or you do not agree with the SDS that you have been given, you do have the right to appeal the decision. Your end-client will have up to 45 days to review your case, and either change your IR35 status if they see fit, or provide a reason why the original determination was correct.
How will contractors be assessed for IR35?
The decision for your IR35 status will be up to your end-client and, in the event of an IR35 tribunal, your end-client would need to show ‘reasonable care’ for how they reached your IR35 status. Your end-client may choose to use an IR35 status tool to ascertain your status, such as the Government’s CEST tool, a third-party IR35 tool, or the Kingsbridge Status Tool.
Many tests are used concurrently to assess an inside or outside IR35 status for your contract. However, based on case law, there are three status tests which are seen as the major tests, and each can swing your IR35 status one way or the other:
Mutuality of Obligation
Often referred to as MOO, has been instrumental in previous case law. As a contractor, you should not feel obligated to continue providing services to your client after the contract has finished. Equally, your client should not be under any obligation to offer you further work once your contract has finished. If an ongoing obligation does apply for either party, this would point to MOO being present, and in turn, point your engagement towards being inside IR35.
Right to Substitution
This refers to having a clause in your contract that if you are sick or unable to complete the work, you have the right to send in a suitable substitute to complete the work for you.
This is in regard to the level of control that a client has over your contract and the way that you work. If your client is viewed as having a significant amount of control over how and when you work, this would point more towards an employer-employee relationship. In theory, once the brief and deadline have been set, you should be left to complete the contract how and when you see fit. There are, of course, exceptions, for example, if you are required to work on-site, you may only be able to access the site during certain hours.
How can contractors check their IR35 status?
Being able to provide an IR35 status assessment to your end-client can help to swing your IR35 status, particularly if you are concerned about how you will be assessed and what the decision will be. HRMC’s CEST tool is free to use and can be used through the Gov.uk website. Although it can be a good starting point, it has been criticised for somewhat overlooking one of the key IR35 status tests, MOO. Furthermore, in the event of an intermediate result (which has been reported as coming up for 1 in 5 cases), the only available action is to call HMRC directly.
Another option available is a fully manual IR35 tool. Although these are typically more comprehensive, they are generally slower to get a result and more expensive. Here at Kingsbridge, we have seen a high level of contractors engaging with IR35 now that the reforms are here, and we would expect this to be the case for most contractors across the country. If you want a quicker result, there are other automated IR35 tools available as well as CEST. This would give a quicker result than a manual tool, but again these can get stuck when an IR35 result is not clearly inside or outside.
The final option available to you is Kingsbridge’s award-winning status tool. Developed by our very own Head of Tax, Andy Vessey, the hybrid tool will give an instant result if you are deemed as inside or outside IR35. In the event of an indeterminate result, it will be passed to our IR35 experts for manual review. Once you have received your status assessment, you will also get access to a comprehensive report that will highlight the strengths and weaknesses of your engagement and can be sent directly to your end-client. Purchase an IR35 status review today for just £50 plus VAT.