Contractors’ questions about the IR35 reform
Recently, Kingsbridge’s IR35 experts Ryan Dawson and Matt Tyler hosted the ‘IR35 – One Year On’ webinar to mark a full 12 months since the reforms to the off-payroll working rules were brought into effect.
The hour-long session – which you can watch here – took a deep dive into the key challenges faced by contractors in the year following the reforms, looked at how the future landscape might appear for contractors, and offered a live Q&A to answer delegates’ top IR35 questions. However, as is often the case, we received far more questions than Matt and Ryan could answer during the session, so Matt set to work answering the remaining questions once the webinar ended.
In this blog we’ve pulled together those questions and answers for you to read at your leisure. And remember, if your question isn’t answered here, or you just want to find out more on IR35, the Kingsbridge Knowledge Hub has a dedicated IR35 section with features on everything from determining your status to appealing an SDS.
Contractors’ IR35 questions answered
Kingsbridge’s Consultancy Manager, Matt Tyler has answered as many of your questions as possible below:
Q – I am a consultant lawyer. If fees for one of my clients are structured as a monthly retainer (i.e., a guaranteed monthly fee unless retainer is terminated), does that make relationship higher risk of being inside IR35?
A – Generally speaking we would advise against any payment structures that could be seen to be paying a contractor for time spent not providing services. For example, a retainer structure could be seen to be making payment for time spent not providing service if the contractor is never called upon in the month in question. A more IR35 friendly way of operating this style of engagement could simply be to pay an hourly/daily rate and have the contractor only bill for time spent on the services.
Q – What would be the case of documents being security sensitive and cannot be removed from site?
A – Data protection/security is a genuine reason as to why a contractor may be unable to provide services from a location of their choosing. If the secure documents are key to the contractor’s services, then it would be reasonable to require the contractor to provide services from the secure location.
Q – What is the benefit for a contractor to review the IR35 status now? The fee payer is responsible for the status determination.
A – Whilst it is true that the end client is responsible (not necessarily the fee payer) for determinations for the majority of contractors these days, thanks to the changes in legislation in 2021, this is not true for all contractors. If the contractor’s end client is a small company, as per Companies Act 2006, or is entirely international with no UK permanent establishment – both criteria must also look at any group of companies that your client is part of too – then the contractor is responsible for determining their own status for IR35 purposes. This is an area where a contract review will assist you. Our own survey indicates that, of our respondents, 30% still had to self-determine status in the year following the reform so it’s certainly not that uncommon. In addition, having a contract review can assist in any dispute that a contractor wishes to bring against their client in the event that the contractor disagrees with the SDS that has been provided.
Q – What is the reason you are not recommending CEST for status determination?
A – There are a number of good reasons why CEST isn’t recommended, but in our mind first and foremost would be the fact that CEST in 21% of all determinations between 25 November 2019 and 31 August 2021 gave an ‘undetermined’ result. This result is rather unhelpful as it gives little to no advice as to the next steps to take. Another good reason would be the fact that HMRC pays scant regard to one of the key status tests (known as Mutuality of Obligations) as they believe it exists in every engagement, even though this understanding has been refuted in numerous instances of case law.
Q – How is a medium or large sized organisation defined? Head count? UK headquarters?
A – HMRC have guidance on this in their Employment Status Manual 10006 and have borrowed the definition found in the Companies Act 2006. To quote:
“A corporate entity will be medium or large-sized if it meets at least two of the following criteria for two consecutive financial years:
– turnover of more than £10.2 million
– a balance sheet total (assets) of more than £5.1 million
– an average of more than 50 employees
Similarly, a corporate entity will cease to be medium or large-sized if it no longer meets at least two of the above criteria for two consecutive financial years.”
Q – What if the client isn’t aware of this and engages outside IR35 contractors?
A – Unfortunately HMRC do not consider ignorance of legislation an excuse. Should a client engage a contractor outside of IR35 and not produce an SDS (assuming of course they have an obligation to do so – if they are a small company as per Companies Act, or a company with no UK permanent establishment they will not need to produce a determination for contractors they engage), HMRC will hold the client accountable for any incorrect tax relating to IR35 should they investigate.
Q – My end client is based in Switzerland and Recruitment Agency is in Spain. Getting a status determination from either is impossible. Are there rules around this in regulation or guidance? But they do have a permanent establishment in the UK via Group.
A – Assuming that the Swiss end client is the entity with the UK permanent establishment, then the next consideration would be what size company they are. As per the Companies Act, if they are a medium/large company (they will need to consider the entirety of any groups they are part of) then they do have an obligation to produce a Status Determination Statement for your engagement. I would suggest that you point your Swiss client to HMRC’s own employment status manual which very clearly states that they will have an obligation and that HMRC can pursue incorrect tax from their UK establishment.
Q – One IR35 question was ‘can you terminate the contract without notice’. I said no, because my Ts & Cs say a 7-day notice period, which is reasonable. That worked against me in the determination. Why?
A – The ideal termination right would be a 0-day notice period (i.e., immediate). Anything above this is a negative, albeit a defendable/negligible one if it is below 30 days (in our opinion). A notice period of any type indicates that you as a contractor are not being treated as an ‘arm’s length’ resource and could be considered integrated. As mentioned, however, notice periods of up to 30 days are generally defendable as often these notice periods aren’t meant as an integration factor, but more to ensure continuity of the work so the client’s project isn’t unduly impacted.
Q – Can the client just say ‘inside IR35’ because it’s easy/low risk for them?
A – The client certainly can ‘blanket determine’ their contractors inside of IR35 but they’d be running the risk of being seen as not taking reasonable care for doing so! ESM10014 provides some details as to what HMRC define as taking (and not taking) reasonable care when coming to determinations and also outlines what happens if the client does not do so. In short, if the client doesn’t take reasonable care when coming to conclusions, HMRC can apply fines/penalties (irrespective of if they agree with the determination) for not taking care in getting to the result. They can even make the client responsible for the liability of an incorrect determination even if the client thought they had discharged said liability to the fee-payer (the entity who pays your limited company – usually a recruitment agency). Whilst blanket determining contractors inside is easy, it is certainly not low risk as it is specifically called out in the aforementioned employment status manual as being an example of not taking reasonable care.
Q – If IR35 has been agreed as inside who is responsible for PAYE and NI?
A – The Fee Payer – the entity that is responsible for paying your limited company. In most arrangements this will be a company which sits between your limited company and the end client – a recruitment agency, employment business, etc – but in some instances where you are engaged directly with the end client, this will be the end client themselves. In theory, the end client makes the determination and passes on responsibility for that determination to the fee-payer.
Q – I am a nurse working as a limited company how does this affect me?
A – Assuming you provide services to a public sector entity (such as the NHS) this will have been a consideration for you (or more accurately your client) since 2017 when the ruleset changed for public sector entities. If, however, you provide services to a private clinic with no public sector links, the changes to the legislation in 2021 are the ones that apply to you. I would suggest speaking to your end client and asking them if they’ve considered their IR35 obligations and then go from there.
Q – My job is pretty specialised and I can’t provide a substitute. That works against me. All jobs have been inside IR35. Any suggestions?
A – Substitution is but one facet of IR35. Whilst not being able to provide a substitute would count against you for the purposes of determining your status, it is not the be-all and end-all of IR35. There are other aspects of personal service which could help (being able to subcontract for example) and there are two other key status tests (Control, Mutuality of Obligations) and a whole range of minor status tests that should be considered before a determination is made. If the client is basing your status purely on substitution, then there is the potential that they are not taking reasonable care in their determinations, which in turn could land your client in hot water for IR35 purposes (See ESM10014 for more details).
To take the substitution point further, it is perhaps worth pointing out that whilst specialism in an industry does make substitution more tricky, it is unlikely to make it impossible – remember that it is the hypothetical right to substitution that is what is looked for – not whether you have someone available here and now. Hypothetically, if you did have someone with the right skills, knowledge, experience to do the job and you presented that individual to the client, do you think the client would be willing to accept them or not? If they would, then you have a right to substitute.
Q – How can IR35 apply to international companies?
A – HMRC would have no jurisdiction over a purely international company (with no UK connection) so IR35 does not apply to them. However, if the international company had a UK connection via a permanent establishment (either directly or via a group of companies that the international company is part of) then HMRC can seek to recover the liability from the UK branch of the international client.
Q – Is a 6-month reassessment necessary?
A – Strictly speaking, the only requirement in the legislation in respect to re-assessments is that one occurs when a ‘material change’ takes place in the contractor’s circumstances. Unfortunately, what precisely a material change comprises of is not well-defined in the legislation! We would suggest, however, that regular re-reviews would be beneficial in showing that reasonable care has been taken and to prevent ‘scope creep’ over time rendering the original SDS invalid. As a minimum, our recommendation is to do this annually, but ultimately the frequency of re-assessments is entirely at the end client’s discretion.
Q – I started contacting in December 21. I have an outside determination from the end client. What risk is there to me of an incorrect determination?
A – If the end client is responsible for determining your status after the changes in April 2021, then they (or the fee-payer if there is one) are the ones that hold the liability for your determination.
Q – I am working through another small limited engineering company like mine. The end user is further down the line, but his company is paying ours/me. Can there be IR35 issue between our companies if he is giving me most of my work in a year?
A – It depends entirely on the setup here, so I’m afraid there is no quick and easy answer to this! This may be an instance of something called “Outsourced Services”. An idealised version of outsourced services would be where the ultimate end client engages an outsourced services provider to complete some services. The outsourced services provider then engages with a contractor (or many if relevant) who report into the outsourced services provider and have little to no interaction with the ultimate end client. The outsourced service provider receives the work from the contractor and delivers it to the ultimate end client as a finalised package.
In the above situation, the contractor’s end client for IR35 purposes would be the outsourced service provider and it would be the outsourced service provider that is responsible for making the IR35 determination of the contractor. If this is approximately how you would be working, you would need to establish firstly if it is a genuine outsourced service. Then once you know who the ‘end client’ is (the receiver of the contractor’s services) you would then need to work out if they are small or medium/large as per the Companies Act. If the client is small, you (the contractor) are responsible for determining your status. If they are medium/large, then they will be. Bear in mind that the client has an obligation in the legislation to confirm their size upon request!
Q – I am working outside IR35 for a client and have a 12-month contract. However, the recruiter/agency said that I will not get an extension beyond 12 months unless I come inside IR35; is this right?
A – Length of contract has very little bearing on IR35. It is the things that come alongside of a longer contract that cause problems, such as being ‘integrated’ into the client’s staff or being seen as part and parcel of the client’s organisation. For example, you may start receiving employee benefits such as free training or invites to social events as you’ve been there a while, which as a contractor you should not get as you are not an employee! So long as you keep the firm and fixed barriers between yourself and your client’s staff there is no real issue with being engaged by the client for a longer period of time. Simply put, this is likely a misunderstanding from the client or there are other aspects at play here that have caused your client to come to that resolution. I would suggest having a conversation with the client about why they have come to this conclusion and act from there.
Q – If my client hasn’t sent an SDS does this mean they are liable for the taxes if HMRC say I’m inside?
A – If the client is responsible for determining your IR35 status then yes, they will carry liability for your IR35 status until they produce and send the SDS to you and your fee payer.
Need to know more?
If you still have a burning IR35 question that has not been answered here, you can put it to Kingsbridge’s Head of Tax, Andy Vessey, using our Ask Andy form. Andy has been heavily involved in IR35 for more than 20 years and has personally defended over 500 IR35 cases, winning almost all of them. If it’s IR35 and Andy doesn’t know it, it is not worth knowing!
Kingsbridge can help you with your IR35 conundrums in other ways as well. If you are unsure whether the terms of your contract place you inside or outside IR35, our Express Contract Review service has our specialist team take a look at the written terms and provide you with an opinion on your IR35 status, offering advice on how the terms can be improved, and giving a re-review once the terms have been amended. Currently we are offering a one-day turnaround for just £100 +VAT. And, if you want to futureproof yourself, your clients, and your fee payers against HMRC investigations, our IR35 Protect insurance covers for taxes, interest and penalties that might result from such inquiries. What makes it unique is that it flexes to cover whoever holds the tax liability for any given engagement, removing the financial risk for everyone involved and making you a much more desirable hire in the process.
For more information on our IR35 services, contact our team today.