IR35 April 2021 – a reminder of what’s happening

Remember when IR35 was the biggest thing to worry about? It feels like a life time ago now, and you may have even forgotten, given everything else that’s been going on. But whilst it may seem like it’s taken a back seat for the government, it’s still very much at the forefront of our accountant’s minds.

So what is changing, when is it proposed to happen and what do you need to do to prepare? In this blog we answer all those questions, keeping it nice and simple, so you can get back to focusing on the important things.

First things first, what’s going to change?

The rules for how to determine IR35 status aren’t changing, and they didn’t for the Public sector either. The only thing changing is the entity in charge of making the determination. Whoever makes the decision is expected to use reasonable care in making the determination, and judge each contract on its own merits.This therefore means:

• Your IR35 status determination will lie with the end-hirer
• The end-hirer will bear the tax risk should they determine your IR35 status incorrectly
• The rules surrounding how your IR35 status is determined aren’t changing, therefore if you’re working on a Private contract and it’s legitimately ‘outside’ of IR35 come April 6^th, you should be considered ‘outside’ by HMRC once the new rules take hold

How might this impact the contractor population?

Some end-hirers may be nervous about bearing the tax implications should they incorrectly determine a contractor’s IR35 status, and may therefore decide to only employ contractors who are using Umbrella companies, rather than being Limited (as Umbrella companies pay tax, PAYE and National Insurance Contributions at source).

End-hirers may also make a blanket decision on their contractors they use and deem they’re all ‘inside’ IR35, so as to not possibly be caught out.

What are the possible implications?

Limited Company contractors who are genuinely ‘outside’ IR35 and incorrectly classed will be made to work on a PAYE basis, and as a result lose out on the tax benefits which come with being truly ‘outside’.

How should the end-hirer determine your status?

There are three key tests which HMRC have laid out to determine your status, all of which the end-hirer must use ‘reasonable care’ when assessing. These tests, often referred to as ‘MSC’ are:

Mutuality of obligation: Relates to the extent you’re obliged to complete work that’s offered to you, or whether the client is obliged to offer you extra work that’s outside of the contract. If your working obligations are clearly set out in the contract and work is limited to those obligations, this strongly suggests that IR35 does not apply.

Substitution: Are you able to send someone else in your place to complete your work? If so, even for a short period this demonstrates that your contract is ‘outside’ IR35.

Control: The level of control your client has over your working practices can impact your status. The more control you have as the contractor when it comes to how, when and where you work, the more likely you’ll be found ‘outside’.

What does ‘reasonable care’ actually mean?

You client must be able to demonstrate that they have used ‘reasonable care’ when determining your IR35 status. Sadly many clients have very little knowledge when it comes to IR35, and therefore may make blanket status decisions without taking MSC into consideration. It is unclear how HMRC is likely to police the ‘reasonable care’ taken.

What about CEST?

Some clients use the CEST online tool (Check Employment Status for Tax), whereby they answer a series of questions about the contactors’ engagement, and the tool tells them whether IR35 applies.

As CEST was designed by HMRC, contractors understandably aren’t keen, and argue it’s weighted in HMRC’s favour. It’s widely considered fundamentally flawed (even HMRC investigations have contradicted their own CEST tool), yet its decision is what your client will base their final IR35 status outcome on.

What can you do to prepare?

Whilst April 2021 may seem like a little way off yet, there are a few things you can do now to ensure you’re ready for the change:

Know what to do if you don’t agree with your client’s decision – If your first contract post April 2021 is decided to be ‘inside IR35 then you’ll want to be ready to challenge that decision. You’re able to process a ‘client-led disagreement’ which allows you to present your evidence to the client, who’ll then have 45 days to respond to your appeal. Download our IR35 Survival Guide for more information on this, and also what to do if your client refuses your appeal.

Find a specialist accountant – if you haven’t already done so, make this your number one priority. Most accountants will have a broad understanding of what IR35 is, but only specialists will have the knowledge and experience to ensure they’re doing everything they can to support you correctly. And if your status is incorrectly determined, a specialist accountant will be on hand to help you challenge it. Take a look at our dedicated IR35 page for more information on the services we offer Limited Company contractors.

Find a solution that works for you, no matter your status – If you’re found ‘inside’ but want or need to continue working on your contract, you’ll have to pay PAYE, National Insurance Contributions and Tax at source. So how do you go about that when you’re a Limited Company contractor? At SG Accounting our sister company, SG Umbrella, provides contractors in this exact position with umbrella services for a monthly fee.

For more information about the services we offer contractors, or to simply have your IR35 questions answered by one of our director-level accountants, get in touch with the SG Accounting team today.