If you haven’t heard of IR35, where have you been? It’s legislation that affects contractors and the companies that use them alike. Introduced by HMRC as far back as 2000 and made more rigorous in 2017 for the public sector, it will come into force in the private sector on 6 April 2020.

So, if you’ve not started preparing, here’s the low-down of what you need to know.

What is it?

The legislation is designed to overcome what HMRC believes to be tax avoidance where someone is working as a self-employed contractor, often via a their Personal Services Company (PSC), but in reality is a “disguised employee.” That means that the company doesn’t have the person on their payroll and tax is potentially being avoided by the company and the contractor.

How Does it Work?

Instead of the contractor deciding whether IR35 is applicable to them, it’s the responsibility of the engager (the company hiring) who determines the IR35 status. Where a contractor’s role is deemed to be within IR35, the individual must be either added to the client payroll (and their income tax and national insurance deducted before payment like a normal employee) or work via an umbrella company on their payroll. If not on a payroll, whoever is paying the contractor must still deduct tax at source as if on a payroll. The company must pay employers’ national insurance too. There is major risk all the way along the supply chain if any payments are made after 6th April without deduction of tax.

What’s the Litmus Test? How do we Know?

HMRC has designed an online test called Check Employment Status for Tax (CEST). It has, however, come in for quite a bit of criticism. Particularly because it doesn’t include the Mutuality of Obligation (MOO) test, which is one of the most fundamental employment indicators.

So, what’s the deal with MOO? Well, according to IT Contracting:

In a contract for services between a worker and client, if there is an obligation by the client to provide future contract work, and an obligation by the contractor to accept this offer of work, then a so-called mutuality of obligation exists between the two parties.For someone truly ‘in business on their own account’, they might expect to be hired by a client to complete a specific task, with no further work being offered following the expiration of the initial contract.

HMRC has assumed that MOO already applies to users of CEST explains this reasoning in these IR35 forum minutes from December 2017. However the courts have in various cases disagreed with HMRC on this but HMRC are not changing the rules and still pressing ahead. As a result, most people will be caught by the tool (“inside IR35”). If the CEST test says you are “outside IR35”, HMRC can still challenge this and check that the correct assumptions have been made.

Can IR35 be Avoided?

The short answer is no. Unless you’re prepared to work outside of the UK, which some contractors will undoubtedly do, or can establish with a high level of certainty that your role falls “outside IR35.”

IR35 will apply only to medium and large-sized businesses. Small businesses (those that can satisfy any 2 of the 3 criteria of under 50 employees, a turnover of under £10.2m, or balance sheet total of less than £5.1m) will not be subject to the new IR35 rules in that the liability along the supply chain will not apply and the responsibility remains with the Contractor. However, the fundamental concept of IR35 and onus to prove you are outside will still apply, so only working for small businesses will not help you avoid the legislation in full.

What are Companies Doing to Prepare?

It’s quite the task to get ready and most companies are frantically trying to work out what to do with contractors who are currently working on projects. Some large banks, for example, have decided to take a blanket approach, rather than assess contractors individually, and have deemed all contractors to be within IR35. This means the contractor has to either join as a permanent employee or engage via an umbrella company to avoid any possibility of HMRC hitting the business with a large tax bill. Many of the businesses putting a blanket ban are ramping up their offshore project teams to cover work that will not be now done by UK contractors.

The economic consequences for the country will not be known for a while and perhaps people will blame Brexit if there is a downturn; IR35 could be more damaging than Brexit in the short term even as it affects so many people, not just within IT but any type of “contractor”. It has also been “rushed” through despite many problems and the fact that companies are struggling to deal with it in the timeframes given so a period of chaos may ensue!

Despite the Government’s promise, pre-election, to carry out a review, IR35 is a reality and it will happen on 6 April this year. In essence, the review will be about how to implement it, rather than a review of the legislation itself. So, companies and contractors alike need to prepare.

Companies need to think about how they will be able to continue business critical projects and contractors will need to review their options. Take perm, go umbrella or leave the country!

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