IR35: Are you in or out?

  • 12 Oct 2021

By Dave Chaplin is CEO and founder of IR35 Shield and author of IR35 & Off-Payroll Explained

Off-payroll legislation (IR35) took effect on 6 April, making medium and large private firms responsible for determining a contractor’s IR35 status, and taxing earnings as employment income if applicable. Many confused hirers have simply blanket-banned limited company contractors.

Earlier this year, contractor Robert Lee lost his appeal against HMRC at Upper Tribunal as judges were forced to rely on the limited evidence provided at First-tier Tribunal, which had led to the conclusion that IR35 applied to work he had carried out. This underlined the importance of reinforcing status assessments with strong evidence, gathered before and during the engagement. If the client and contractor work to create an evidence-based position, it’s difficult for HMRC to claim otherwise.

 

‘Outside IR35’ contracts

‘Outside IR35’ contracts exist, and the key is for both parties to work collaboratively to sustain IR35 status and ensure working practices affirm this. Personal service, mutuality of obligation, and control are the  factors used to determine status.

There are now two versions of IR35 – the original Intermediaries Legislation (Chapter 8 of ITEPA 2003), applicable where the client meets the small company’s exemption or is wholly overseas, and the updated off-payroll legislation (Chapter 10) that took effect in April. The tax treatment differs, and you’ll need to understand why.

Status Determination Statements

If a position is ‘inside IR35’, obtain a copy of a Status Determination Statement and the contract on which it is based. Evaluate it for any flaws in the assessment.

To dispute an assessment, you must make representations to the client, who is obliged to consider them and change the status or provide reasons for not doing so. This means the client is judge and jury, so will dismiss frivolous representations. You’ll need to provide representations just as an expert might prepare the pleadings for a case, highlighting factual errors and misapplications of the law. You may decide to get help with this. 

Calculate rate renegotiations

Working ‘inside IR35’ will impose an employment tax liability on the end-client and/or agency, and a tax hike, so you must know how much to increase your rate by to be net income-neutral. Bear in mind that hirers will also want to pass their new tax bill onto you by way of a rate reduction.

 

If ‘inside IR35’ status arises because a client refuses to do an assessment, try renegotiating your rate to counter your tax hit. The challenge some face is withdrawal of tax relief on expenses. A contractor ‘inside IR35’ who lives in accommodation during the week may need to up their rate by 40 per cent to maintain take-home pay – making the hire untenable.

Beware of umbrellas

It is an unregulated market and you are responsible for any non-payment of tax, not the scheme provider. Be wary of the indicators of non-compliant schemes, such as dubious payment terms or a lack of transparency over payment illustrations. It’s safest to be on the client or agency payroll.

Contractors provide vital skills

It is vital to play an active role in the compliance process, understand the rules and work with clients to ensure contracts align with the working relationship. 

In time, the dust will settle. Once some firms test the water by engaging limited company contractors, others will follow.

Dave Chaplin is CEO and founder of IR35 Shield and author of IR35 & Off-Payroll Explained. Views expressed are those of the author and not necessarily those of FSB.

Related topics