Can IR35 be backdated?
With the IR35 reforms now just over a month away, it really is time to get your house in order…
After years of worry for recruiters, contractors and end clients alike, the IR35 reform is definitely on its way next April. While the coronavirus crisis bought an extra year’s grace on the reforms, the Government confirmed in May that the changes to off-payroll working will come into effect from the next tax year. With business uncertainty already high and the economic hit of COVID-19 still impacting heavily on many industries, many end clients are understandably skittish with regards to contractor status determinations.
It’s a tricky balancing act for recruiters. How can you get clients on side and keep contractors happy, while still complying with a new (and let’s face it, confusing) set of legislative guidelines? The good news is, Kingsbridge has a complete range of IR35 services to help recruiters protect their contractor revenues.
What is IR35 and how is it being reformed?
IR35 is a series of reforms of the tax law around contract working. It applies to contractors supplying their services to an end client via a limited company.
IR35 looks at whether the relationship would be considered one of employment if the intermediary company was not used. If a working relationship falls inside IR35, the contractor and end client have to pay National Insurance and tax contributions as in any normal contract of employment – which can result in a reduction of net income for contractors. Similarly, end clients and/or agencies will have to foot the bill for employment taxes on top of contractor fees.
It’s important to note that work done on a genuine contract basis should not be affected – but this all comes down to status determination, where end clients must assess whether or not a contractual relationship falls inside or outside the rules.
What is an IR35 status determination – and why is it important?
The IR35 legislation now requires that clients provide a written ‘Status Determination Statement’ before the start of any contract, stating the determination of the contractor’s status in relation to IR35 and the reasons for arriving at that determination.
If a contract is deemed to fall within IR35, then the client or recruitment agency (whoever is directly paying the contractor for their services), becomes the fee-payer. This means that they are, for the duration of the contract, the ‘employer’ of the contractor, and become responsible for deducting tax and National Insurance payments from the contractor’s wages.
If a contract falls outside IR35 that is, it represents a genuine contractual relationship – then the contractor is responsible for paying their own tax and National Insurance through their company as usual.
If due care and attention is not given to these status determinations (for example, if blanket or role-based determinations are made), then the fee-payer becomes liable for any unpaid tax and the legal and financial headache that comes with sorting this out.
Why is it important that my end clients are on-side with status determinations?
One of the biggest risks of the reforms for recruiters and contractors is that clients make blanket decisions, over-cautiously converting all of their contractors into deemed employees to avoid falling foul of any fines or tax investigations. This is bad for contractors’ incomes and may make positions harder for recruiters to fill. There is also the risk that a contractor might take the decision to an employment tribunal, and if there is no evidence for it other than a blanket decision, they will have a strong case.
But the opposite – carelessly made declarations that all contracts are outside IR35 – is riskier still, leaving the recruiter open to penalties and liable for unpaid tax should HMRC investigate and determine that the status determination should have been inside IR35.
Therefore, there is a real need for recruiters to work closely with clients, examining each contract on an individual basis, to determine status fairly, fully and with the ‘reasonable care’ that the legislation requires.
How can I navigate the IR35 reform process with my end clients?
Each contract needs to be examined on an individual basis to see whether it falls inside or outside IR35. Remember that HMRC may also go ‘beyond the contract’ and look at the established or expected working practices and obligations. For recruiters who are dealing with potentially hundreds of contracts, that is a mammoth task.
Specialist IR35 accountants are now offering their services to end clients and recruiters alike, but with rates of £100 per hour, it’s simply not feasible for recruiters to engage one to examine every single contract that they advertise.
HMRC have their own tool, CEST (‘check employment status for tax’), which your client might be keen to use. However, you and the end client should be warned that this has proved to be wildly unreliable when applied in the real world. When tested against the outcomes of 22 IR35 tribunals, it produced the correct result only 8 times. In fact, only last year, HMRC tried to argue that their own tool was ‘irrelevant’ during an IR35 tribunal. The CEST website is there as a basic guide, but we wouldn’t recommend using it as your only determination tool, especially for recruiters dealing with many complex contracts per day.
Recruiters can’t bury their heads in the sand about IR35, or leave status determinations to the will of the end client. It’s important that you engage early and be proactive about reaching status determination decisions collaboratively, or you risk either financial exposure in the form of tax penalties or trying to recruit into ‘inside IR35’ roles which may be harder to fill.
Kingsbridge can help
Our new IR35 status assessment tool is a lifeline for recruiters looking to protect their contractor income. It provides a quick, easy and robust way to assess status determinations that’s backed up by IR35 specialists that’re on-hand to review and guide on borderline results. Inputting the information from a contract and working practices will produce a result that tells you whether or not that engagement falls inside IR35. The quick turnaround time – with results available in minutes, 24/7 – lets you challenge decisions quickly and get contractors engaged before they decide to move on elsewhere.
Our white-label feature can be branded and offered to end clients as an additional service, or you can use the system to double-check client determinations, making sure that you agree with them and you are not exposing yourself to any unnecessary risk as a potential fee-payer. It’s also a good demonstration of due diligence, showing that you have indeed taken ‘reasonable care’ in producing the status determination.
With the information that the Kingsbridge IR35 status assessment tool provides comes power – you can use the results to engage with the end client, make any recommended changes to the contract and to secure positions for your contractors that suit their needs.
We have a range of pricing structures to suit recruitment agencies of all sizes – why not test out our service with a 7-day free trial? Book in for a demo today here.
