What is IR35 and what is happening on the 6th April?

The fundamentals of IR35 are not changing: understanding the key status indicators – personal service, control and mutuality of obligations – is still as important as ever.  It is also vital to make sure that these are properly documented in a comprehensive contract with a limited company contractor (often referred to as Personal Service Company or PSC) and the contractual terms are fully supported by the working practices.

These things are the foundations of any relationship designed to reflect two independent contracting parties.

What is changing is the basis of IR35 decision-making and who will bear the liability. From 6 April, the responsibility falls with the end-client.

There are three key tests used as a result of the status case Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance (1968) which are:

• Personal service - is the working arrangement personal to the individual or does the individual  have the right to utilise another person in his place to perform the services?

• Control – is the individual subject to control of his engager as to how he performs the work or is he free to determine his own method?

• Mutuality of Obligation (MoO) - is there an obligation on the engager to provide work to the individual and a reciprocal obligation on the individual to perform this work?

In order to be outside of IR35, it must be shown that one of the three key tests of employment Personal service, Control and Mutuality of Obligations is missing from the arrangement, meaning it is a business to business arrangement which doesn’t demonstrate employment.  It means that contractors can deal with their income to their company as normal business income, and typically draw down this income by a mixture of salary and dividends.

Contractors which are considered to be “caught” or  “inside” of the IR35 legislation have arrangements which demonstrate all the key employment factors of Personal Service, Control and Mutuality of Obligations, meaning that for tax purposes they are seen as employees of their client.  It means that a “deemed payment” calculation must be operated on all income to the contractor (the deemed payment differs slightly depending on whether the Public sector/ Private sector reforms apply, or whether the long standing IR35 legislation applies).  The deemed payment calculation is contained in the relevant legislation but it essentially means the majority of the Contractors income must be subject to TAX and NI.

A fee-payer is a concept introduced by the public sector legislation and will be highly relevant in the private sector.  The fee payer is the entity which pays the contractor and if an end client engages contractors directly, then they are both decision-maker and fee-payer.

Where there are agencies in the chain, the agency directly above the contractor —which is responsible for paying the contractor —is the fee-payer. This agency is liable for the tax and NICs not deducted if the decision was to pay the contractor gross.

End clients – Determine whether the engagement is one for you to decide or part of an outsourcing arrangement.

Make sure you have robust contracts and ensure that you have determined the status of each and every engagement where it is your responsibility.  Both in preparation for April 2021 and in the future.

Agencies – Ensure that you understand enough about IR35 to know whether an engagement is caught or not. Ensure that your contracts to both end client and contractors are robust.