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Markel Tax

15 Mar 2021

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

IR35 – or to give its full title, the Intermediaries Legislation – is a UK legislation which came into effect in April 2000 and was designed to target what the then Inland Revenue perceived as ‘disguised employment’: contractors whose relationship with the businesses that engaged them was more akin to employment. 

IR35, at is core, seeks to establish a hypothetical contract between the worker at the bottom of the chain and the end-client at the top – effectively it says: “if there was a direct contract between the worker and the end-client then would that contract be one of employment or self-employment?”

In order to draw up this hypothetical contract, we have to look at everything, which is relevant to the provision of services, which currently exists between the worker and the end-client.  This requires looking closely at contracts and working practices.

6 April 2021 – what are the key changes?

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.

How do you determine if an engagement falls within or outside of IR35?

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?

What does it mean to be  ‘outside’ of IR35?

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.

What does it mean to be ‘inside’ IR35?

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.

What is a fee payer?

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.

What can I do to prepare?

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.

We have been advising and defending clients against IR35 challenges since the introduction of the legislation 20 years ago. We offer a complete package of due diligence services to ensure you are well prepared and protected.

Markel Tax’s FeePayer Protect insurance is specifically designed to defend against an HMRC enquiry and even the potential tax losses where you are also the fee payer. What’s more, we are able to provide you with contract reviews including the whole supply chain from end-client through agency to the contractor, support in drafting an SDS, as well as training and on-going support from our tax experts.

Speak to our team today to find out how we can help you protect yourself against IR35 risks. Call 0333 920 1589 or request a call-back.

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Next article in series

15 Mar 2021

IR35: What do recruitment agencies need to do to protect themselves?