No, IR35 was introduced back in 2000 by a Labour Government. Historically, IR35 was the risk and responsibility of limited company contractors but since its introduction HMRC were concerned that there was widespread non-compliance but did not have the resources to police the legislation effectively.In 2017 HMRC effectively did a trial run of getting clients to police IR35 for them and recoup the relevant employment taxes up front, by getting public sector authorities to assess the IR35 status of contractors they engaged. HMRC said this was a success and decided to extend the regulations into the private sector in 2021, postponed from 2020 following the COVID-19 pandemic.
IR35 can be managed by clients in-house, but in most cases organisations just don’t have the knowledge, expertise, experience or capacity to maintain IR35 processes on an ongoing basis.Often the ownership of IR35 will sit with a member of HR or finance who already have a maxed out workload and it can be difficult for them to devote the required amount of skill and attention to instil and maintain IR35 processes.
Appointing an IR35 Service Provider is the sensible way to ensure IR35 compliance with minimal impact and distribution to your business. An IR35 service provider can take away a lot of the ‘thinking time’ and menial tasks that are associated with imbedding new processes, whilst picking up most of the heavy lifting that is involved.
Yes, the off-payroll working rules require each contractor, who is operating via its own Personal Service Company (“PSC”) to be assessed for IR35. You can, in some instances group contractors together for the purpose of assessing; however you will need to be certain that such contractors work under the same contract and have identical working practices.
The off-payroll working rules require clients to demonstrate Reasonable Care when determining contractors IR35 status, so you will need to ensure the person doing the IR35 status reviews are skilled and equipped to perform such task and you need to ensure that Status Determination Statements (“SDS”) are kept under constant review. In the event changes to contracts and working practices occur, consideration should be given to ensure the SDS remains up to date.
This should be considered on a case by case basis. The key is to ensure that processes are embedded to flag when there are changes to contracts and working practices and that IR35 checks are scheduled as appropriate, depending on the nature of the role. For ‘higher risk’ roles where it is likely that the nature of the role could change and evolve, we would suggest reviewing on a 3 monthly basis. In most cases we would suggest reassessing on a 6 monthly basis, but for those contractors who are strongly outside IR35, then you could revert to reassessing annually.
Yes, you can consider what changes can be made to contracts and working practices to strengthen the IR35 position of a role, however it is not always possible to change the determination and this will come down to the reasonings as to why the role has been categorised as Inside IR35 and the client's willingness and ability to change the contract and working practices.
There is no prescribed form for an SDS or specific method by which the SDS should be issued but it must be issued to the contractor and fee-payer (normally the agency) before any payment to the contractor is made.If the client does not pass the SDS directly to the worker and to any third party it contracts with, it will assume responsibility for the deduction of tax and NICs. By clients taking reasonable care in coming to the status determination and issuing the SDS to contractor and fee-payer, the client has discharged of its duties and if HMRC believe the contractor is Inside IR35, it will be the fee-payer who becomes liable for any PAYE, NICs and apprenticeship levy that falls due.
The fee payer is the party paying the PSC (i.e. the entity directly above the contractor’s limited company in the supply chain). In most cases it is the client or an agency.If a contractor has been determined as Inside IR35, the fee-payer becomes responsible for applying the employment taxes (PAYE, NIC’s) along with apprenticeship levy, if applicable, in respect of any payments made.
In accordance with the off-payroll working rules, clients are required to have a process in place which allows contractors to dispute the status of the role. This will likely come into play following a change in status after reassessing, as contractors will be aware of the IR35 status of a role before accepting an assignment and therefore unlikely to challenge.
In relation to challenges, the legislation requires the client to:
consider the contractors representations whether verbal or in writing
issue a response to the contractor within 45 calendar days, beginning with the day the representations are received (not from when the SDS was issued) confirming that:
the it has considered the representations and decided that the SDS was correct and provide supporting reasons, or
it has considered the representations and decided the original SDS was incorrect, issue a new SDS with the date the new SDS became applicable and confirm that the previous SDS is withdrawn.
Disagreements are often complex and tend to get into the intricacies of the already complex area of IR35, therefore it is advised that unless it is abundantly clear that the original determination will stand, it is advisable to seek the advice and support of your appointed IR35 service provider who can also help with defining a process and channel for disputes to be dealt with.
If a client does not comply with the minimum requirements of the status disagreement process, the responsibility for the deduction of tax and NICs and payment of apprenticeship levy will transfer to it, so it is important not to fall down at this point.
No, IR35 status is determined by considering both the contract and working practices. Both must reflect each other and demonstrate that the role is Outside IR35.
No, as stated above contract documentation and working practices must be aligned. If a contractor is working under a fixed price, timebound SoW, then it is likely that the role will be categorised as Outside IR35, as long as the SoW contract is reflected in practice (e.g. fixed fee quoted in the SoW but paid monthly over contract duration, could negatively impact the IR35 status).
No, and there are numerous reasons why. Firstly, the key obligation on end-clients is to demonstrate reasonable care in reaching IR35 determination and HMRC specially state that “determining that every worker who provides their services through an intermediary is caught by the off-payroll working rules without giving any consideration to the specific facts of each individual case” is not applying reasonable care. Secondly, you would be limiting your ability to attract the best talent particularly when IR35 processes can be implemented seamlessly by an IR35 service provider.
The HMRC guidance on attaining Reasonable Care includes examples such as:
seeking the advice and support of a professional advisor;
have someone with a good understanding of the work involved in the IR35 determination process;
ensure determinations made for existing engagements are accurate, so mistakes can be identified and not repeated in future determinations.
consider whether there is a new contract or a continuance of an existing contract when a contractor is extended and ensure the SDS is updated accordingly.
make a new status determination if there is a material changes to a worker’s terms and conditions, or working practices;
keep processes under review and amend as required to ensure IR35 determinations and SDS’s remain accurate;
In contrast, examples of not demonstrating Reasonable Care are:
determining that every contractor operating via a PSC is caught by the off-payroll working rules, without giving any consideration to the specific facts of each individual case;
making a determination when it is known and anticipated that the contractual terms and/or working practices will change meaning that the determination will not represent the true nature of the engagement;
determining that the off-payroll working rules apply to a group of contractors who have variations between the work that is being carried out;
failing to identifying changes to contractors and/or working practices and reconsidering determinations in such instances;
Failing to provide sufficient training and support to relevant staff members to enable those individuals responsible for making determinations to accurately apply the off-payroll working rules;
inputting inaccurate information into CEST;
failing to take account of all relevant evidence;
failing to ensure that the person completing the IR35 assessment has the skills, knowledge and expertise to do so; and
the client subcontracting the SDS process to another party and not confirming the accuracy of that conclusion and the reasons for it.
No, we have found with most clients that outsourced supplier populations present an unhidden risk. If your outsourced service provider is not providing goods and materials and it is the sole shareholder and director who delivers the services, then this may still constitute a PSC which should be assessed for IR35 - even though the service being obtained look and feel like an outsourced service.
We find that when implementing compliant IR35 processes the most complex and time consuming tasks can be i) getting key stakeholder buy-in, ii) identifying the ‘in scope’ population, iii) identifying what suppliers would fall within scope, iiii) ensuring each off-payroll worker is assessed and v) ensuring reassessments are undertaken on an intermittent basis relating to the risk profile of the role.
The IR35 liability initially sits with the client who is required to perform the IR35 status review and communicate the status in the form of an SDS to contractor and feepayer. If the client has applied reasonable care in performing these actions but HMRC still concludes it got a determination wrong, the client has relinquished all exposure to the unpaid taxes and penalty and this transferred to the fee-payer.
HMRC will pursue clients or fee-payers for the unpaid tax (20% - 30% of payments) plus interest and penalties. In the most extreme cases the penalties can be up to 100% of the tax that is due, therefore potentially doubling the initial liability.
If a liability arises due to of a lack of reasonable care, the penalty will be between 0% and 30% of the tax due. If there is deliberate not compliance the penalty will be between 20% and 70% of the tax due and if the error is deliberate and concealed, the penalty will be between 30% and 100% of the extra tax due
The off-payroll working rules only apply to public sector authorities and medium to large organisations. There is no requirement for clients to assess the IR35 status of contractors they engage if they are deemed to be a small business entity or a wholly overseas client.
If a client does not exceed two out of three criteria below, it will be considered a small business and consequently, the responsibility for assessing IR35 status and applying any relevant employment taxes will remain with the contractor.
Have an annual turnover of more than £10.2 million;
Have a balance sheet total of more than £5.1 million;
More than 50 employees
A client is considered to be wholly outside the UK for the purposes of the off-payroll working rules it does not have a UK connection (i.e. it is not UK resident and does not have permanent establishment in the UK). If the client is operating in the UK and has a branch, office or premises, then the rules are likely to apply.
Wholly overseas clients do not need to consider the off-payroll working rules. In this scenario the engagement would not be within the scope of Chapter 10, Part 2 ITEPA 2003 the contractors remains responsible for determining its own IR35 status and apply appropriate taxes.
Yes and we have seen this is an area that many organisations are yet to explore. It is possible that a client could engage with a consultancy to provide services on an outsourcing basis but the client may also obtain a resource from the client, in a similar way it does from an recruitment agency. In such instance this would likely constitute a supply of labour with the client being responsible for performing the IR35 status review and the consultancy becoming the fee-payer and responsible for deducting any PAYE, NIC’s and apprenticeship levy, that may fall due.
Clients should consider IR35 insurance, but first should assess if it is really required and will it cover you in the event you do need to rely on it. IR35 insurance shouldn't be treated as a way to absolve any IR35 associated risks. Whether you have insurance or not, clients should still work on instilling a process which enables them to assess all off-payroll workers and continue to demonstrate reasonable care. If this is done properly then you are unlikely to succumb to a lengthy HMRC enquiry and be liable for any unpaid employment taxes.