Ask Andy: When does IR35 apply?

If you told us back in April that we’d still be writing our Ask Andy column in October, we’d have laughed. But here we are, still getting questions for Kingsbridge’s Head of Tax, Andy Vessey, from contractors trying to make sense of the updated IR35 legislation.

This month, we have questions on when IR35 does and doesn’t apply, and what you can do if you and your client don’t see eye-to-eye on your status determination. Read on to find out more.

This article is for information purposes only and should not be seen as financial advice. You should always consult with your accountant for any tax advice.

I am a UK resident working from London and I have been contracted by the French subsidiary of a UK-based group to carry out a six-month project. I work full-time remotely from London and would invoice the French subsidiary that contracted me. My feeling is that I am outside IR35. Could you comment on that? 

You do not say whether or not your end client is within the scope of the off-payroll rules (OPR). If they are, then it is the end client who will be responsible for determining if your contract falls inside or outside of IR35 and not you. Either way, in making that determination it is incumbent on the decision-maker to consider all the necessary tests of employment by reference to the contractual and actual working arrangements.

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? 

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.

I would like to check with you, if I may, does IR35 apply at all for an end client in the UK, and a contractor who is a UK citizen, but has not been resident in the UK for at least five years and the intermediary is also non-UK resident?

UK residency in this context would be based on the RDR3: Statutory Residence Test (SRT)?
According to the SRT, a non-UK resident can work in the UK for up to 30 days in
the tax year and still be considered a non-UK resident (provided all other tests pass)?

If it turns out later that HMRC does not agree with the outside IR35 determination made by the end client, or the “fee-payer” otherwise fails to withhold PAYE and NICs, who is responsible for the unpaid PAYE and NICs and who must pay it? The end client, the “fee-payer” or the contractor?

Would there be any other considerations and/or do you recommend a proper consultation?

It is the residency of the worker that is important when considering whether or not IR35 applies. The residency of the worker’s limited company is therefore irrelevant. If the end client falls within the scope of the off-payroll working rules (OPR), i.e., it is a medium-to-large sized company, then they are responsible for making a status determination.

HMRC guidance ESM 10025 confirms that where a worker is a non-UK resident and not liable to tax and NIC in the UK, then the OPR does not apply. In the first instance, therefore, if the end client is satisfied that the contractor is a non-UK resident and can provide evidence to ratify that, then they should be able to rely on this as fact.

Where an end client incorrectly assesses a contractor’s employment status then it is they/the fee-payer who remain responsible for any underpayment of PAYE tax and NICs.

How to Ask Andy…

If you have your own IR35-related question to put in front of Andy, you can do so by completing our simple online form.

In the meantime, if you want to find out whether you fall inside or outside IR35 for a particular contract, you should take a look at the Kingsbridge IR35 Status Tool. Designed by Andy, the Status Tool can give you an accurate inside or outside IR35 result quickly, and for just £50 plus VAT. And, if your status turns out to be borderline, your case will be passed over to one of our in-house (human) IR35 experts for a manual review, giving you confidence that your determination is accurate.