IR35: Your Contractors’ Questions Answered

IR35

IR35 is a hot topic among contractors these days. Of course, to some degree this has been the case since it was first implemented, and it hasn’t been out of the industry headlines since the Public-sector reform in 2017. Things are heating up, though, as Private-sector reform approaches, and more contractors realise their IR35 status is about to be taken out of their hands.

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If you’re not already, you’ll soon be engaging contractors on assignments that will be affected by the Private-sector changes. For example, 12-month contracts now go beyond April 2020, and those contractors will need to know how it affects them.

For this reason, you’re likely to see many more contractors asking questions about IR35, either seeking to understand the basic principles, or looking for concrete information about your policy or that of the end client. Here are some of the more common questions, and how our experts would answer them.

What is IR35?

You’ll usually get this question from new contractors, or those who have been getting most of their advice from high-street accountants who may not understand the importance of IR35. The answer is that IR35 is legislation designed to prevent tax avoidance by so called “disguised employees” using an intermediary, like a contractor’s limited company. If the contractor would have been seen as an employee if the intermediary was not involved, the legislation ensures they pay roughly the same amount of tax as an employee would.

Can I avoid IR35?

Every contractor who trades through their own limited company has to consider IR35, so on that level there’s no way to “avoid” it, and certainly choosing to ignore it will create unacceptable risks for them, you and your client. However, depending on their circumstances and their relationship with the end client, they might fall outside the scope of IR35. If they’re working in the Private sector, they’re currently responsible for determining their own status, so when you get this question it’s a good idea to steer them towards a professional review by an IR35 specialist. 

What will change in 2020?

At the moment, on Private-sector contracts at least, your contractors are responsible for determining their own IR35 status, and they are liable for any unpaid tax and NICs if they get it wrong. You and your client have no involvement in their tax affairs, except maybe to offer advice or refer them to experts like Orange Genie.

From April 2020, unless they count as a small company, the end client will be responsible for determining the status of any contractor they engage.

Additionally, if the end client determines the contractor is inside IR35, you as the fee payer will have to deduct PAYE tax and NICs from the contract rate, before paying the contractor’s Limited company.

As HMRC is fond of pointing out, IR35 itself is not changing, and contractors who are genuinely outside before the reform will still be outside after it. The difference is that the client, and not the contractor, has to decide what the correct status is.

My contract has a substitution clause, so I’m covered, right?

We can see where this comes from, but unfortunately, it’s not that simple. While having the right to send a substitute is a strong indication that a contractor may be outside IR35, there are two quite large caveats.

  • Just having a substitution clause in the contract is rarely enough; the contractor must have the ability, and not just the theoretical right, to send a substitute for it to have any effect on their IR35 status.
  • There are many factors that contribute to a contractor’s IR35 status, so even where it exists in practice and not just in the contract, the right to substitution alone may not be enough if other factors indicate that they’re inside.

How can I make sure the client decides I’m outside IR35?

The first part of this answer is to find out what their actual correct status is, and again for this we’d recommend a professional review by an IR35 specialist. If the contractor is inside IR35, it’s not advisable to encourage the client to determine incorrectly, as this would be terribly risky for everyone involved. If the contractor’s status is weak or borderline, the specialist reviewer may be able to recommend action that would strengthen an outside position, either by changing the contract or adjusting their working practices, but this is not possible in every case.

Where the contractor is clearly outside IR35, this question becomes one of communication with the client, who may need to be convinced that an outside determination does not leave them at risk. The specialist review will often help here, as will any evidence the contractor has been able to gather. See our guide to working outside IR35 for more detailed information.

What’s a “blanket decision?”

When similar reform hit the Public sector in 2017, many Public-sector bodies automatically assigned the same IR35 status to all contractors in a particular role, without completing individual assessments for each contractor. These “blanket” or “role based” decisions did not comply with the legislation’s requirement that “reasonable care” be taken in determining IR35 status.

As it was perceived to the least risky option, most blanket decisions placed all contractors inside IR35, which unnecessarily increased the cost of hiring contractors, while significantly reducing their pay. This in turn led to staffing problems across the Public-sector.

From a contractor’s point of view, we’d advise that individual assessments are necessary, and that they should speak to the client if they believe blanket decisions are in use. It’s also important that Private-sector end clients understand that blanket decisions are not a viable solution if they want to access the skills they need at a sensible cost.  

Do I have to use CEST?

Check Employment Status for Tax is HMRC’s online tool for determining IR35 status, and it’s been widely criticised for giving incorrect results. We would prefer if the answer to this question was always “no”, but if the end client insists on using CEST, your contractor may not have a choice. If you have any influence over the client, we advise steering them away from this tool, at least until the updates HMRC have promised are implemented and evaluated. If they are determined to use CEST, we strongly advice it’s used in conjunction with a full, individual review.

If I’m inside IR35, do I have to switch to umbrella?

There should be no reason why a contractor can’t continue to trade through their limited company if they’re inside IR35. However, some clients and even some recruiters may insist. We believe this is a mistake, as contractors will naturally seek contracts where they can work how they want, and forcing all contractors down the umbrella route can make it more difficult to source key skills.

That said, many contractors decide independently that umbrella is the best option, particularly if they expect all their future contracts to be inside IR35, as they take home roughly the same pay and have additional employment rights. For those who expect some contracts to be inside and some outside, you might recommend a product like Orange Genie Complete, which allows seamless movement between umbrella employment and trading through a limited company.

How often should my status be assessed?

As a minimum, IR35 status should be assessed for each new contract or extension. It’s usually better, from the point of helping the contractor remain outside IR35, if they’re contracted for a particular piece of work, or a finite length of time, rather than having a rolling contract.

If you have any questions or if we can help in any way, please contact our expert team on 01296 468 483 or email info@orangegenie.com.

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