The government brought IR35 into law in January 2000 in an attempt to reduce ‘Disguised Employment’. Put simply, this is when someone is acting as an employee but under the title of a ‘contractor’. Subsequently being in more control of their remuneration methods, and therefore the taxes they pay. IR35 allows HMRC to collect additional payments from those who fall inside this legislation.
Despite significant early opposition in the form of a Judicial Review and Appeal, the legislation remains and a whole range of IR35 services have emerged over the years – from employment status experts to insurers.
There are two main responsibilities when it comes to IR35:
- Assessing status to establish if the contractor falls inside or outside IR35
- Paying the necessary taxes if the contractor is inside IR35
Today, these are the responsibility of the contractor however, this is about to change.
What are the new IR35 changes?
Due to the pandemic, the changes to off-payroll rules that were due to come into effect on 6 April 2020 were delayed and are now due to apply from 6 April 2021.
From 6 April 2021 the rules for engaging individuals through personal service companies or other intermediaries are changing. The responsibility for working out if the off-payroll working rules (IR35) apply will move to the organisation receiving an individual’s services if they are classed as a medium/large business. If the engager is small or foreign the legislation will not have any effect, and responsibilities will remain as they are presently. If the engager is medium / large the changes apply. The Companies House definition of ‘small’ determines the size of the engager.
Under new IR35 Regime medium/large engagers must assess each contractor as to determine whether they would be caught inside IR35 or not. This needs to be provided to the PSC which must include reasons for being inside IR35. If it is felt that the PSC would not be caught by IR35 then an appeal against the decision must be made with the engager. The engager must provide answer to appeal within 45 days of receipt. Although there is no deadline on time passing before appeal can be raised obviously the sooner the better as tax and national insurance could be deducted from payments until resolved.
How do the IR35 changes affect insurance?
As mentioned, the idea of ‘status’ is subjective which also means that it can be insured.
There are two types of insurance that contractors should consider. Firstly, ‘fee protection insurance’. This pays for the cost of dealing with HMRC if the company or its director(s) are investigated by HMRC. It usually covers investigations in any/all taxes. Secondly, an insurance that pays all of the additional IR35 taxes and NI if the contractor is deemed inside IR35 by HMRC, provided the review is satisfactory and carried out by the insurance company themselves.
It is not clear exactly how changes to IR35 will affect insurance. It is thought that insurers are developing a ‘co-insurance’ product. This should allow the contractor to continue to be insured, but in a manner that will allow the engager to be insured against the potential taxes also. It should also allow them to be comfortable that they have met their legislative requirements. Also that the end client has also met theirs.
The Next Steps
It is important for contractors to be proactive now. However, it is also important not to panic. The changes relate to where the responsibility for being outside IR35 lies; the definition of whether the contractor is inside or outside is not changing. If a contractor is outside IR35 now and does not change their contract or working practices then they will still be outside IR35 after April 2020.
There are therefore two things that contractors need to be sure of:
- that they are currently outside IR35 and are able to prove it
- that their contract and working practices will not change adversely after April 2020
In order to do this, contractors should obtain a new, up to date, professional contract and working practice review now.
If this review fails and they find themselves inside IR35 they may have the opportunity to make the necessary changes to secure a ‘pass’. It will then be possible to perform a re-review. This will provide the hard evidence necessary to prove they are operating outside IR35.
How can we help?
Grampian Accounting has been active in assisting our clients with IR35 matters ever since the tax came into being. Reviewing contracts and working practices is not a new activity, and we have always advised that this be done. There is a long established history of achieving positive results by performing these reviews and acting on the results. We can assist with arranging professional reviews from the two best IR35 expert companies in the UK. The review should not cost more than £150+VAT, plus, at worst, an hour or so of our time coordinating this – depending on which company is chosen. We can provide the contact details for the reviewers and insurers and/or facilitate this.