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IR35 Advice Centre

 

IR35 Compliance Guide

IR35 Compliance Guide
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IR35 Guidance

 

IR35 Compliance for Contractors

Despite changes to the administration of IR35 from April 2021, the way in which it is determined remains the same.

Below we explain the main status tests that need to be considered to assess IR35, how to comply with the legislation and why. (Please note that this is only a brief guide; it is not intended to be a comprehensive analysis of employment status).

If you have any queries regarding IR35 or the below IR35 compliance guide, please do not hesitate to contact our consultancy department on 0116 2690 992 or [email protected]

 

Who is responsible for IR35 compliance?

 

The party responsible for IR35 compliance depends on when and with who you are contracting. Since 2000 when the legislation was introduced, it was the sole responsibility of the contractor, however, due to IR35 reform in both 2017 and 2021, this is not always the case.

The responsibility for IR35 lies with the contractor if:

  • you are providing services to a client in the private sector which is classed as a small company under the Companies Act 2006

The responsibility for IR35 lies with the end client/fee-payer if:

  • you are providing services to a client in the public sector
  • you are providing services to a client in the private sector which is classed as a medium or large company under the Companies Act 2006 from 6th April 2021

The off-payroll working rules, introduced in the public sector in 2017 and to the private sector in 2021, mean that it is the end client’s responsibility to determine IR35 status. It will also be the fee-payer's responsibility to deduct the relevant tax and National Insurance from source where you are determined as 'inside IR35'. For the private sector, this applies only to medium-large clients.

Every member of the contractual chain inbetween is responsible for ensuring they contribute to the compliance of an engagement by passing the status determination statement along the chain.

Read more about IR35 changes in the private sector.

IR35 Status

 

The key factors which determine your IR35 status

 

It is important to note that each working arrangement is reviewed on its own merits and all of the positive and negative elements of both the written contract and working practices will be weighed up in line with case law in order to provide a balanced opinion.​

When considering overall IR35 compliance for the entire engagement, it truly is a mixture of different factors, not simply the written terms. You should ensure that any contract proven to be outside of IR35 also matches the working practices of that engagement. So, if the contract says you are expected to provide your own equipment for the services, you should make sure that you are not using any client equipment during the provision of the services. This is because when determining IR35 status, the working practices are seen to hold more weight or are also referred to as the reality of the engagement.

What are the IR35 tests?

 
  • Office Holders

  • Right of Substitution/Personal Service

  • Control

  • Mutuality of Obligation (MOO)

  • Financial Risk

  • Right of Dismissal

  • Part and Parcel of the Organisation

  • Exclusive Services

  • Intention of the Two Parties

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A Contractor's Account of IR35 Reform

Neil shares his story about contracting before and after the introduction of IR35 reform (the off-payroll working rules)

IR35 reform came into force in the private sector on 6th April 2021 after facing a year-long delay, placing the responsibility for determining IR35 status on the businesses which engage this vital resource. Our recent article 'Six months on from IR35 reform' explores what has happened since, but to truly understand the impact, we need to look at how the fallout of these changes was felt by those most affected: the contractors.

One of the many contractors impacted by IR35 reform, Neil shares his honest account below about the reality of contracting post-IR35 reform and how this has affected his plans for the future.

"Back in early 2020 I was in the middle of an amazing experience at a large multi-national corporation, on their largest programme and providing a range of services that saw me liaising with everyone from C-suite to ’shop floor’, and this is where my skills are; working across these areas where some individuals only work at C-suite level or only work at people management level or shop floor level."

"Back in 2004 I had been working for 10 years at a large [telecommunications company] and was finally offered a more senior position after successful interviews. However my expected trajectory was cut short as the company had other employees they needed to map into new roles rather than make redundant. My dream job was given to someone who I had worked with previously and I knew had little skill in, and also did not have the interpersonal skills the role demanded. I actually ended up being asked to coach this person and they were disastrous in the role. This wasn’t because they were trying hard but lacking in skill but rather they only saw the role as a stopgap in their own eager climb up the corporate ladder."

"This was a turning point for me and made me question my longer term ambitions. I concluded that climbing the ladder wasn’t for me, I wanted to carry on in my role but work my way to the top in terms of being the best at it. After 12 months of zero change in my prospects at that corporation, I handed in my notice having decided to go contracting, and what a rude awakening I was in for!"

"Within 10 days I had started a contract at another large [telecommunications company] and was busy setting up my limited company etc. I was very nervous not knowing what to expect and recognising that contractors usually are expected to ‘hit the ground running’. I joined a team of around 40 contractors on a huge delivery of customer self service portals and was so shocked at the chaos. Clearly some of the more vocal individuals who knew senior managers there had ‘assumed charge’ over the work but seemed more desperate to orate than roll up their sleeves. Structure and objectivity were not things these people focused on, they wanted to be considered the ‘gurus’ that the senior management needed to rely on. I worked with an amazing guy who is still great friends with me today. After the initial chaos we managed to ringfence some work by approaching one of the managers and proposing a better way. He listened and gave his full support, seeing the value. Within 6 months we were realising huge benefits from our work where much of the other work had lurched along and not really delivered. Although the project was closed down eventually our work continued and we were asked to continue providing services."

"A full 15 years later and I had learned a lot and worked across many organisations. My principles always mattered to me in spite of what I have sometimes been told by others. First of all I treat clients the way I like to be treated, secondly although lucrative contract work is good I have never just chased the money, preferring to be remembered for the way I work and the values I hold. This has often paid off anyway with old clients remembering how I have conducted myself. Having said this my principles were really going to be put to the test."

"THE CORPORATION WERE BEING CAGEY,
WE WERE GIVEN VIRTUALLY NO INFORMATION"

"So back to early 2020 and all the UK contractors at this large multi-national corporation were aware of the incoming IR35 reforms, but the corporation were being cagey, we were given virtually no information. A slide deck got out though which set out options that were being considered but an email followed within hours demanding that all recipients delete it and email a response to confirm they had deleted it and would not share its content. As you can imagine the slide deck getting out may not have been great but instead of engaging with contractors and using the opportunity positively, the response demonstrated that no such approach was going to be employed."

"Eventually in February 2020 I was informed via email that with immediate effect I was being given notice and that my contract would end on 31st March just before the date the government had set for IR35 reform introduction. Even when the government postponed it by 12 months the corporation would not reconsider. I was once asked by a manager there how things were going with the impending changes and I just opened up a little bit, explaining that it was stressful not knowing what was going to happen next. His response was forthright lecture on being grateful for having work, that we were paid far more than permanent employees etc. There was no point in me responding with anything more than saying yes of course permanent employees are having a tough time too."

"I then found out that a large consultancy had agreed to fulfil the services that myself and others on numerous projects were providing. These guys arrived on site in March and as I suspected most were graduate trainees with a handful of management to oversee them."

"COVID WAS JUST HITTING AND THE MARKET DRIED UP"

"I had started to reach out to agencies but Covid was just hitting and the market dried up for a few months. This resulted in me being out of contract until October. 6 months with no work. My wife is [a] full time mum with part time work but her work dried up too. We have some family with personal health issues such that we try to help them out, so for us contracting was a way to give back, and gave me the freedom of being my own boss."

"During the time out of work we used all our savings up but we felt like we could not open up about how we felt to anyone. I saw that those who did were seen as having a moan and being ungrateful, especially those rich contractors. Yet for us we were using any extra income to support a family member with dire health issues who is not provided with sufficient support from the government. But again, when you mention you are a contractor I think some people conjure up pictures of large houses, fast cars and big spending."

"WHEN YOU MENTION YOU ARE A CONTRACTOR I THINK SOME PEOPLE CONJURE UP PICTURES OF LARGE HOUSES, FAST CARS AND BIG SPENDING"

"Well, just in the nick of time I was offered a contract in the public sector. The net income was 50% what I had been earning previously but there were just no contracts out there to choose from and I was starting to worry. The contract was inside IR35 and via umbrella. Oh boy did it make me livid."

"I’d never worked via umbrella before, and in spite of choosing a large and reputable one, I was disgusted in the government pushing me to have to work this way when the umbrella with an army of lawyers was doing far more than I ever did via my limited company to ensure their tax bill was as streamlined as it could be. I don’t blame the umbrellas, they are doing what any switched on corporation will do, make money out of an opportunity. So here was I paying them an extortionate fee for ’services’ when most of their ’services’ were automated. I spoke to two people at the outset and sent two emails at the end of my assignment, other than that it was literally just offering payroll. But to have HMRC consider an umbrella to be a preferable scenario to multiple limited companies was shocking."

"My income meant big changes for us as a family, and I don’t mean changing from M&S to Lidl, I mean not being able to afford to run a car, having to get a lodger in so their rental would help with bills, and literally not being able to afford to take a day off. I would get anxious when public holidays came round as I knew my income was going to drop for that month. My wife was brilliant, by my side all the way and trying so hard to do part time work while also bringing up children."

"Eventually I accepted a new contract in the private sector on better pay, but inside IR35. Despite attempts to promote outside IR35 contracts, there really are not enough of them out there. This year I decided to shut down my limited company and have resigned myself to having to work via umbrellas for the foreseeable future. I see all around me contractors in the same position. And yes, some did previously have more disposable income, but because they paid less into pensions or into vehicles or houses and were sought after for their skills. Many of these people were the ones who would use this disposable income to go and buy on the high street, invest in a business, employ builders to renovate a house, or eat out."

"DESPITE ATTEMPTS TO PROMOTE OUTSIDE IR35 CONTRACTS, THERE REALLY ARE NOT ENOUGH OF THEM OUT THERE"

"The new post IR35-reform world means that this disposable income now goes into the coffers of corporations instead, and yes into the pockets of the few on the board of directors in these companies. HMRC has created an anti-competitive situation as companies know they have you over a barrel as there aren’t sufficient outside IR35 roles to compete so the inside IR35 assignments are often not brilliantly paid. More importantly though I have seen that they are much more hierarchical in nature. No longer can I operate as an experienced and skilled consultant who has been brought on board specifically to be proactive, but instead I am to toe the line and take instruction. I have a limited remit. I have to work the assigned hours and in the assigned manner. I have to conform."

"This has left me completely stripped of my ability to compete as you cannot argue with the client on a role being inside IR35. So I either join a large consultancy where others dictate the terms, or I work inside IR35. Going permie is an option but one I don’t want to take as I am used to being my own boss now. Perhaps a role outside IR35 will present itself, but I just haven’t seen enough of them. I am considering a career change and a move overseas as I feel completely betrayed by HMRC, they seem to always help the big fish at the expense of the small fry. Many would argue that I am being overly dramatic and should just get a permanent job like everyone else, but I have spent over 15 years as my own boss and I thrived on it. Why should someone else tell me to get a permanent job over running my own business? My father worked for himself, and I aspire to be like him, but am currently forced into not being able to. Hence considering a career change into running my own business, but one that HMRC cannot take away from me."

"So what of my principles? Well, they were severely tested. But I don’t give in easily, and I still treat my clients (employers now) the way I like to be treated. It’s just that now I cannot step outside my assigned remit to really add value, indeed if I ever stray I am reminded that I must remain within those boundaries. I feel like the guy at the end of Goodfellas, except instead of gangstering, I was working honestly and was adding value to this country and to the coffers of HMRC."

"The one plus side of inside IR35 but via umbrella is at least I still don’t have to complete a quarterly performance review, that would really take the biscuit!"

 

As we await the outcome of the House of Lords inquiry into the performance of IR35 reform, we remain hopeful that voices like Neil's will be heard.

Similarly to the first inquiry, the inquiry promises to be a comprehensive and fair account of the changes. Having called for responses from impacted parties, the inquiry will touch upon the effectiveness of HMRC's CEST tool, the level of support provided to contractors and businesses by HMRC, and more.

For support and guidance with IR35 reform, please visit the IR35 Advice Centre or get in touch with our team who will be happy to help any way they can on 0116 269 0992.


By:Qdos Contractor
 
 

IR35 Guidance

 

How to comply with the IR35 legislation

When it comes to complying with the IR35 legislation, you should consider the following steps:

  1. Review each engagement for IR35 status. This includes assessing both the written terms but also your working practices (the reality of the engagement) against the key factors above.
  2. Check that your working practices mirror what is detailed within your contract. The reality of the engagement holds more weight than the written terms so it is important to ensure your contract is a true reflection of the engagement.
  3. Keep a record of your due diligence. This could include copies of third-party contract reviews, a Confirmation of Arrangements and/or relevant correspondence which may help evidence your position.
  4. Ensure the relevant tax and national insurance is paid for your status. Being compliant with IR35 is often confused with being 'outside IR35', but compliance really just means paying the correct tax for your employment status. So if you are operating 'inside IR35' for an engagement, then a deemed payment must be made.
  5. Maintain up-to-date assessments of your engagements - ensuring reassessments throughout the engagement or if there are any material changes
  6. Keep an eye on relevant news for any changes or updates to how status is determined

Since April 2021, whilst it might no longer always be the contractor’s responsibility to determine their IR35 status, contractors should still be focusing on ensuring compliance within their engagements.

It is important to remember that the reform does not apply to any engagements with companies classed as small as per the Companies Act 2006 and contractors are still liable for any services provided prior to April 2021. See above for more information on who is responsible for IR35 compliance.

 

 

IR35 compliant contracts

 

An IR35 enquiry from HMRC will always begin with a request for copies of your written contracts relating to the accounting period in question, with proof of why you consider it to be outside of IR35. A robust contract may stop a full-blown investigation in its tracks, so it is essential to ensure compliance in this respect. A variety of status tests, outlined in this guide, are used to assess your contract, with no single test putting you inside or outside the legislation. Both the contract and working practices will require assessment as a whole using all of the status tests to determine your employment status.

​The contract does not need to be in writing - an oral or implied contract is legally binding if the parties intend it. The terms of the contract can be collected from the circumstances surrounding the engagement.

​It is not only your contract with a recruitment agency which may be assessed; in Usetech Ltd v Young the High Court decision made it clear that the "upper level" contract between the agency and the end client was to be considered in deciding the status of the worker, notwithstanding the terms of the agency's contract with the worker's Personal Service Company. Most contractors, however, will never see the upper level contract or have any rights to.

​HMRC will look to see if you have taken ‘reasonable steps’ to ascertain your status and so it is imperative to have each contract reviewed in order to display this. View our contract review services here.

Having your contract reviewed by an independent third-party expert, will give you a better idea of where your engagement sits in regard to IR35 status. While such a review gives you the IR35 status of that contract, however, in order to find out the overall IR35 status of the engagement you will also need to undertake a review of the working practices of that engagement.

Working Practices

 

The working practices of an engagement is how those services are provided in reality.

The written contract between the contractor and the end client could be perfect in terms of IR35, demonstrating key areas such as substitution, control, non-exclusivity and mutuality of obligation but this will also need to be proven in practice. Although the written contract remains important in determining status, should you be unfortunate enough to be subject to an IR35 enquiry, HMRC will look closely into your working relationship with your client.

​In an ideal world, we would like an IR35 friendly contract mirrored by the working relationship with the client.

If you are subject to a status enquiry by HM Revenue & Customs, the Status Inspector will normally want to obtain information from both you and the end client about the practical working arrangements of each engagement. This is known as constructing the "hypothetical contract" between the worker and the client. It is vital therefore that there is a clear understanding between you and the client about the nature of your day-to-day working relationship. This will also apply to situations where there is no written contract.

​We offer services for assessing your working practices, including a Working Practices Assessment and a free Confirmation of Arrangements document which can both be assessed by our consultancy team.

 

Why is IR35 compliance important?

 

Non-compliance with IR35 could leave you with not only the weighty cost of defending yourself against an enquiry from HMRC but also the potential burden of being saddled with the cost of any unpaid taxes should you be caught by the legislation.

Anyone can be investigated by HMRC, and should you be found to be inside IR35 but have paid tax as an outside IR35 contractor, you will be required to pay back the tax, interest and potential penalties as a result.

You should also bear in mind that an enquiry from HMRC is by no means a walk in the park, not only can these proceedings be extremely stress-inducing but they also have the potential to go on for a long time. The cost of defending yourself from an IR35 enquiry can very swiftly mount up if you don't have an insurance policy.

For services provided under the off-payroll working rules (i.e. in the public sector since 6th April 2017, or to a medium-large private sector business since 6th April 2021), you will not hold any liability as the contractor and it will be your client of fee-payer who will be subject to such an investigation in relation to these services.

 

 

Top 10 Tips for IR35 compliance

 

1. Have your engagements assessed for their IR35 status, by doing so you can evidence compliance with the legislation should your engagements ever come into question from HMRC. By opting for a mixed approach of both a contract and working practices review, you will have a clear picture of the reality of your engagement in terms of IR35 status.

2. Educate yourself about what IR35 might mean for your engagements and keep up to date with the legislation. By using the wealth of online articles available to you, you stand a better chance of ensuring compliance in the way you provide your services by simply knowing what could be classed as inside or outside of IR35.

3. Ensure communication within your contractual chain. By doing so, each party will know what they are accountable for. By keeping track of each other and the determination process it will be easier to make any necessary changes to better IR35 status.

4. Take care when checking that your working practices accurately reflect the written contract you have signed. Not only should you be actively monitoring the way you provide the services to ensure you are acting in a way that is compliant with the terms of your contract, but you should also be collecting evidence to prove this is the case.

5. Make sure you are providing services in a manner that is consistent with working outside of IR35 or pay the relevant taxes if not.

6. Collect evidence to show you are treated differently to your client’s employees. Examples of this would be a record of any relevant emails or other forms of contact with your client.

7. Look for contracts that are outside of IR35 at their very base level, in other words, project-based contracts rather than time-based contracts. Always have a good read of the contract before signing. Another example of this is that you should look to see that you are not individually named within the contract and are only referred to as a business.

8. Seek to attain a Confirmation of Arrangements. Having a CoA signed by your end client greatly increases your chances of successfully defending yourself from an IR35 enquiry. For more information on what a CoA is and how to attain one, see here.

9. Show you operate a genuine business and that you are not part in parcel of your end client’s company. Examples of this would be investing in stationery for your business, such as letterhead paper, or simply wearing an ID badge when attending your client’s site.

10. Have proof that you have taken financial risk on behalf of your business. Examples of financial risk would be holding relevant business insurances such as Professional Indemnity Insurance or Public Liability Insurance. Both of which we can provide for you here at Qdos.

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