Smaller Companies and Day Rates: Ask Andy Answers
Kingsbridge’s Head of Tax, Andy Vessey, has been hard at work answering your IR35-related questions and we have something of a bumper crop for you this week.
Andy has been applying his 20-years of experience defending IR35 cases to satisfy your queries. So, if you’ve been wondering about the impact of shifting from outside IR35 to inside it, or whether HMRC can use the reforms to take retrospective action against you, read on…
What will be the impact if I shift from an outside IR35 contract to inside IR35 for the same client and same role? I may have to do this as my client has mentioned that they won't be engaging with PLCs anymore.
HMRC have been at pains to reassure contractors that they will not use information acquired as a result of the changes to the off-payroll working rules in order to open new IR35 enquiries for previous tax years, unless they have reason to suspect fraud or other criminal behaviour. This statement can be found in HMRC’s guidance ESM10036.
So, other than having to suffer deductions of PAYE tax and employee’s NIC where your contract has been adjudged ‘inside’ IR35 by your client, your previous contracts with them, which you have deemed to be ‘outside’ IR35, should be immune from enquiry if HMRC are true to their word, and unless they suspect fraud or other criminal behaviour.
If I do contract work for a company that has a turnover of less than £10 million, does that fall outside or inside IR35? Also, most of my clients are Tier 1 Contractors with turnover of £100 million plus. Can I still work for them without being taxed at source by them?
First of all, if the company doesn’t also have a gross balance sheet value of £5.1M, or less than 50 employees, it will be a small company for the purposes of the off-payroll rules effective from 6th April 2021. In that case, it’s business as usual and your PSC is responsible for self-assessing the IR35 status of the contract.
In answer to the second part of your question, if your clients fall within the scope of the off-payroll rules, then they will be responsible for determining your employment status from 6th April 2021. If they deem you to be caught by IR35, then your income will be subject to deduction of PAYE tax and employee’s NIC. However, you can appeal against such a decision, which the client has to respond to within 45 days. If, however, the client deems you ‘outside’ IR35, then happy days.
My current contract commercials are structured around a simple day rate linked to a set of project deliverables and a delivery timeline. Would it be preferable to structure any future contract extensions or new contracts around work packages, with payment on completion of specific work packages or on monthly instalments based on progress to milestones? Obviously, that's commercially riskier than a simple day rate.
Basis of payment is a neutral factor. In fact, in the first-tier Tax Tribunal case of Primary Path Ltd v HMRC , HMRC argued that an hourly rate of pay was an indication of employment as an independent contractor customarily charges a specified fee for a particular task. The Tribunal disagreed, as for a highly skilled specialist such as Mr Winfield (the contractor) they would have expected an employment contract to remunerate him on a specified salary pro-rated for each month. Within the context of professional skills, hourly rates of pay are a feature of the present business world and, in this case, the basis of payment pointed away from a contract of employment. This would equally apply to a daily rate.
If the majority of the more important employment status tests such as right of control, absence of personal service, absence of mutual obligations, financial risk, business on own account, provision of own equipment, rest in your favour then there is no reason why you should forego a daily fee if that is more profitable for your business, as your contract should still fall outside of IR35.
Will the legislative reforms be retrospective? I am planning on retiring at the end of 2020 and therefore closing my Limited Company.
The off-payroll rules do not take effect until 6th April 2021 and are not retrospective. So, for the year 2020/21, unless you are contracting within the public sector, the obligation for assessing your IR35 status is yours.
Provided your company has met all its tax obligations, then once your company has been successfully dissolved HMRC are highly unlikely to raise an IR35 enquiry into a company that no longer exists, unless they suspected fraud.
How to Ask Andy…
Do you have an IR35 question niggling away at you? Put it to Andy using our simple form and he’ll do his best to answer.
And remember, one of the best preparations you can make for IR35 in the private sector is to insure yourself and your supply chain, just in case HMRC should come knocking. Kingsbridge’s IR35 Protect packages give you complete peace of mind and boost your hire-ability by ensuring you’re risk-free for clients and fee-payers.