IR35 – What if I’m found inside?
One of the biggest worries contractors have about the IR35 reform scheduled for April 2021 is what happens if an end client completes your Status Determination Statement (SDS) and finds you to be inside IR35. For many of you, it feels a bit like the Wild West: un-chartered territory where anything could happen.
Well, the good news is that that’s not the case. Although it maybe is unfamiliar territory, it’s not a free for all where you have no say or defence. The bad news is there are still implications to being declared inside IR35. The main ones are the way in which you will be taxed, the amount you will pay, and how this could affect HMRC’s view of your previous contracts. We’ll go through these in more detail for you here.
You will be taxed at source
The main change if you are found inside IR35 is that you will begin to be taxed at source, paying income tax and employee’s NICs via PAYE at the same rates as regular employees. This is because your contract and working practices, as far as your end client is concerned, position you as a disguised employee and, therefore, you should be taxed in the same way. Obviously, you can appeal, and perhaps look at renegotiating contract terminology and working practices so that you can be outside IR35, but this may not be possible or your client may not be open to it.
Now, you can continue with your contract in this way if you wish and that’s completely up to you. However, you do need to ask yourself if it’s worth it, and there are a couple of factors to consider.
1. You will be taking home less pay than you would be outside IR35. You could try to renegotiate your fee with your client in order to boost that, but they may not be open to that.
2. You will be being taxed as an employee but you won’t get any of the perks of being an employee: no sick pay, no annual leave, no company pension. So, you’d be losing out financially in the name of fairness, but not actually getting as much in return as the people you’re being brought in line with.
That all being said, all is not lost. If you don’t agree with your client’s status determination, you can appeal and they have 45 days to review and respond. You can also discuss with them the shortcomings of HMRCs CEST tool and, instead, guide them towards expert status review tools such as the Kingsbridge Status Tool, which gives instant feedback on your IR35 status, plus a full report with specific feedback on how to improve your status. Any borderline results will be referred to our expert panel to manually review before giving you an answer.
Can HMRC go back and investigate previous contracts?
Whether or not HMRC can use this determination to go back and check previous contracts is entirely dependent on your situation. In their own guidance EMS10036, they state that they will not use any information gained as part of the legislation rules to initiate enquiries into previous tax years. So, if your SDS finds you inside IR35, they won’t use this as a basis for investigating contracts in other tax years where you were outside. This is the approach they took with the public sector IR35 reforms and so far they have been true to their word.
However, and this is important, HMRC do retain the right to investigate previous tax years if they have reason to suspect fraud or criminal behaviour. So, if they believe you have been declaring yourself outside IR35 and knowingly acting as a disguised employee, they can still investigate and decide if you do, in fact, owe them anything. This is largely the same situation that exists now and means that you could be held liable for unpaid taxes and NICs prior to 6th April 2021, which means there could also be penalties to pay, and legal costs if applicable. Depending on your situation, this could amount to a lot of money.
The most sensible thing to do here is to take out an IR35 insurance product such as IR35 Protect. This unique insurance policy flexes to cover whoever holds the liability, which means it covers your fee-payer for investigations into post-April-2021 contracts, but you for any earlier ones. So, not only does it give you peace of mind, it also makes you a less risky prospect for clients in terms of IR35. The policy also gives you access to the Kingsbridge Status Tool, enabling clients to get an accurate view of your IR35 status.
At Kingsbridge, we’re doing everything we can to prepare our contractors for the IR35 reforms. If you need further advice on our products and services, you can call our friendly, knowledgeable team on 01242 808740 for more information.