The first point to remember about IR35 is that the definition of ‘status’ in the tax world has subjective elements. Therefore, there not a 100% definitive list of requirements that define a contractor’s status as being ‘inside’ or ‘outside’ IR35. HMRC have announced changes to IR35, and this has left some contractors confused as to where they stand with regards to the new legislation. Below we have outlined the key, basic facts about IR35 and what contractors can do to relieve the headache that can surround it, moving forward constructively.
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:
Today, these are the responsibility of the contractor however, this is about to change.
In April 2020 the rules surrounding IR35 will be changing for some contractors. However, their ‘status’ will remain the same, assuming contract and working practices do not alter. While the two responsibilities previously mentioned will not be changing, they will become the duty of the ‘engager’.
These engagers are usually agencies, but can also be the final client in some cases. There are two different groups of engagers – small and medium / large. If the engager is small 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.
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 and 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 and that the end client has also met theirs.
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:
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 have the opportunity to make the necessary changes to secure a ‘pass’. It will then be possible to perform a re-review which will provide the hard evidence necessary to prove they are operating outside IR35.
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 £125+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.