We appreciate IR35 reforms can be very confusing – especially for contractors. Here, our compliance experts answer some of your frequently asked questions to help you navigate the reforms and understand how they’ll impact you.
As we approach the implementation of the IR35 reforms on April 6th, there’s no doubt that you’ll have many questions about what’s going to happen and how it’ll impact you.
We’ve collated a series of our frequently asked questions from contractors to help dispel some of the myths surrounding IR35, giving you peace of mind that you are well-informed and properly prepared.
“Since it’s my agency/end client’s responsibility to determine whether I’m ‘inside’ or ‘outside’ IR35, I shouldn’t have to worry.”
As it will soon be your end client’s responsibility (unless they are classed as ‘small’) to conduct a compliant employment status assessment, and issue an SDS (Status Determination Statement) to you and your agency, you may be asking yourself: “if it’s not my responsibility, why should I care?”
Well, currently, and until April 6th, it is your responsibility (if you work in the private sector) if your status is incorrect. Under the current rules, it is your Limited Company that would be held liable for the repayment of any incorrect or unpaid tax payments if HMRC were to find you were treating yourself as ‘outside’ IR35, when you should have been ‘inside’.
However, from 6th April 2021, if you’re not engaging with a small company, and if HMRC can prove that your employment status is incorrect and employment tax is due, the first port of call to reclaim this unpaid tax is your recruitment agency. If they can’t collect from your agency, they will move on to the end hirer to try to claim the unpaid tax. And, if it can be proved that one party in the supply chain hasn’t followed the rules, for example, they haven’t conducted your assessment with ‘reasonable care’, then liability may remain with the end client.
While it will no longer be your responsibility to determine your IR35 status (unless you have a ‘small’ end user), you must ensure that you are properly prepared and informed about the reforms as they could have a big impact on your take-home pay and the way you work. If you’re unsure how your agency or end client will be conducting status assessments, or you don’t yet know the status of your role post-April, make sure you get in touch with your agency as soon as possible because early preparation will mean you’ll have time to identify a new working option, such as Umbrella, or amend some terms in your contract if appropriate – allowing you to keep working ‘outside’ IR35 and maximising your take-home pay wherever possible.
“I have been working the same contract for over 2 years, so I’ll automatically be ‘inside’ IR35”
One common misconception we often hear about the reforms is that if you (the contractor) have been engaged with one end client for a long time, this means you’ll automatically be caught by IR35 (‘inside’ IR35).
This is not the case. There is no time limit that makes an assignment ‘inside’ IR35.
However, the longer you work with one end client, the more likely you are to be deemed ‘inside’ IR35 as you may over time begin to appear more like an employee. This is because as you spend more time completing work for a client, there is an increased risk that your working practices become less output focussed (contractor-like) and less formal (employee-like), and you can begin to look like an employee.
So, while there is no formal threshold which brings a role ‘inside’ IR35, you should be aware that there is an increased risk of the position changing over time to become more employee-like than it was at the beginning of the engagement.
Nevertheless, there are ways that you can minimise this risk if you are working on a long contract, such as with continual management and conscious review of your role, to ensure your original working practices and conventions remain strongly ‘outside’ IR35.
“I work with multiple clients, so I’m clearly ‘outside’ IR35”
Another statement we hear regularly is that if you (the contractor) are operating more than one role at a time, with multiple end clients, then this means you’re ‘outside’ IR35 because you’re “not behaving as an employee”.
Again, this is untrue. Having more than one client doesn’t automatically make you ‘outside’ IR35.
In fact, it’s not unusual for contractors to find that out of two assignments: one will be ‘inside’ and one ‘outside’. Or, both contracts could be deemed ‘inside’, or both ‘outside’. This is because your IR35 status is determined on your working practices and the terms of your contracts. So, no matter how many contracts you’re operating, if your working practices indicate an employee-like relationship with a client, you will classed as ‘inside’ IR35 for that role and may have to review your working options.
However, there is a case that if you have a record of working with several end clients at once or of rapid moves between different roles, you are more likely to conform to the necessary terms for an ‘outside’ IR35 status. This is usually because if you are working with one client for a short period, your approach to contractual terms, deliverables, and where/how you work are likely to be more of a business-to-business approach, rather than employer-to-employee. Therefore, if you operate in this way, you are less likely to appear ‘inside’ IR35 for the majority of your roles.
But remember, if your working practices look employee-like, you will always be deemed ‘inside’ IR35 for that specific role – even if you have multiple clients you’re working for.
“My contract says I’m not an employee, so I’m ‘outside’ IR35”
When determining your IR35 status, assessments take into account not only your contracts but your working practices too.
Therefore, this statement is untrue. Even if your contract states you’re not an employee, if your working practices demonstrate that you’re acting like one, you will likely be classed as ‘inside’ IR35 for that specific role.
When it comes to IR35 assessments, working practices outweigh contractual terms. So, just having a clause which says that you’re a contractor is not enough unless it is backed up by your working practices.
This doesn’t mean, however, that your contract isn’t important. It’s vital that you review your contract regularly and keep it up to date. But no matter what your contract says, if your working practices are those of an employee, a few contractual terms stating otherwise will not change the opinion of an employment status expert or a tribunal.
Therefore, if you want to remain ‘outside’ IR35, it is your working practices that you need to focus on, and then ensure your contract reflects them.
“My agency can substitute me, so I’m ‘outside’ IR35”
Many misconceptions surround the ‘right to substitution’ check. One of the main ones we often hear is that if your agency can substitute you for an equally qualified worker, this means you’re ‘outside’ IR35.
This is not the case. The crucial part of the Right to Substitution check is that you, the PSC, should be making the substitution.
To indicate you are ‘outside’ IR35, your PSC should have the right to supply another worker who is suitably capable to fulfil a role if you’re unable to. Typically, your PSC would then be responsible for paying the substitute.
If an agency supplied an alternative worker, they would only really be fulfilling their normal role. This wouldn’t satisfy the ‘right to substitution’ test or indicate that you’re ‘outside’ IR35.
“I’m a temporary officeholder, so I can be ‘outside’ IR35”
Again, this is untrue.
If your contract is fulfilling the position of an officeholder, such as an HR director, this is treated as an ‘inside’ IR35 role as you’re acting in the position of an employee.
However, this doesn’t necessarily mean that all of your roles will be ‘inside’ IR35. It is possible that if you are fulfilling that officeholder role, you could also, in another situation, take on an ‘outside’ IR35 role.
Nevertheless, you must remember that if the work you’re doing is fulfilling the role of an officeholder, it is likely to be ‘inside’ IR35.
“I’m a contractor for maternity cover, so I can be ‘outside’ IR35”
Similar to the situation above, often contractors believe that if they’re on a short contract, covering for someone on maternity leave, they will be deemed ‘outside’ IR35.
This is not the case. If you are covering the role of an employee, then by definition, you are likely to be following the same working practices as that employee.
Therefore, if your role is maternity cover for an employee, you are likely to be ‘inside’ IR35.
How we can help
If you’re unsure where you stand, don’t worry, our experts are available on 01244 684700 to answer any questions you may have and help you prepare for the changes. Or, click here to book a consultation.