Client Co. hiring manager asked me if I could give him a short guide to IR35 and what the changes actually mean to help them make a decision. I've knocked up the text below and would appreciate a sanity check before I send it to them.
EDIT : Current version based on feedback is here : https://www.contractoruk.com/forums/...ml#post2717673
Once I stop getting substantive feedback I'll replace this version with the final one.
IR35
What is it?
IR35 stands for Intermediaries Regulation 35. Introduced as part of the Finance Bill 2000, it was intended to have two effects:
• Firstly to prevent employers from dodging their NI obligations by making employees redundant on a Friday and re-engaging them on a Monday as “contractors”.
• Secondly to counter a perceived abuse of the Tax system by individuals operating as one-man-bands specifically in order to avoid tax under PAYE, something HMRC describes as “Disguised Employment”.
HMRC have an extremely poor track record in enforcing IR35 in the second scenario and have lost the vast majority of cases they have brought to Tax Tribunals.
How is it applied?
HMRC uses IR35 to challenge the employment status of individuals by testing their contracts and working arrangements against a hypothetical contract of employment. This contract is based on employment law and relies on 3 key factors.
• Supervision, Direction or Control,
• Mutuality of Obligation
• Right of Substitution.
These factors are all recognised in law as being essential to a contract of employment and have been tested repeatedly in the courts. While other circumstances may be considered (See other factors below) for a contract of employment to exist all three must be in effect.
1. There must be Supervision, Direction or Control (SDC)
For supervision to apply there must be someone overseeing another person doing the work to ensure that they are actually doing it and that the work is being done correctly to the required standard. Supervision can also involve aiding or assisting someone to develop their skills and knowledge.
Direction involves someone making another person do their work in a certain way, generally by providing instructions, guidance and advice as to how the work is to be done. Someone providing direction will often coordinate how the work is done as it is being undertaken.
Control is where you have someone dictating what work a person does and how they should go about doing that. This also includes the power to move the worker from task to task as priorities change.
2. There must be Mutuality of Obligation (MOO)
In simple terms, MOO means that in order for an employment relationship to exist, there must be an obligation on a work-provider to provide work and an obligation on the individual to carry out the work. For clients with freelancers working outside IR35 this means that if the client has no work for them to do, they are not obliged to find any nor pay them when work is not being done. For the Freelancer they are not obliged to accept any work from the client nor can they charge the client when work is not carried out.
3. There must be no Right of Substitution (ROS)
In the context of IR35 a right to substitute means a contractually enforceable right for a limited company contractor to replace its representative, at their own cost and subject only to reasonable criteria such as suitability. Provided the substitute is appropriately qualified and experienced the client should not be able to refuse the substitution.
What is changing?
In April 2020 HMRC are changing who is responsible for determining the IR35 status of freelancers providing services via Ltd Companies in the private sector. Up until now it has been the responsibility of the freelancer to make the determination and pay personal and corporate taxes appropriately. This typically involves paying for contracts to be professionally reviewed, documenting working arrangements and taking out insurance against HMRC investigations. Liability for Tax and NI arising from an incorrect decision rests with the Freelancers Ltd. Company. The fact that such insurance is readily available at reasonable cost is an indication of how likely HMRC are to be able to successfully bring a case at the Tax Tribunal.
In April 2020 the decision on status is being moved from the Freelancer to the notional “Fee Payer”, in effect the end client of the Freelancers Ltd Company. The financial liability for an incorrect decision is also moving to the Fee Payer.
Fee payers are not permitted to conduct blanket assessments of status. Each engagement must be decided on its own merits and Fee Payers must provide an appeals mechanism for Freelancers unhappy with the decision.
It is important to note that none of the underlying employment law or existing case law around IR35 is changing. Freelancers properly operating outside of IR35 before this change will still be outside afterwards.
Other Factors
While SDC, RoS and MOO are the key factors involved, other circumstances may clarify the situation in cases of doubt. These include:
Use of Equipment
While the provision of certain vital client equipment is a given, using client laptops, mobile phones and cars, suggests that a working arrangement is perhaps more suited to that of an employee.
Business Presence
For a contractor’s working arrangement to fall outside IR35, it’s important they operate just like any other business. And this includes having a business presence. Insurance, a company website, letterheads, business cards, a registered office address, legal structure and VAT registration could indicate to HMRC that a contractor is genuinely self-employed, and not working through a PSC simply to avoid paying employee taxes.
Number of Clients
Working on a number of different contracts at the same time indicates that a contractor is less likely to be working in an employee-like arrangement, and therefore outside IR35.
Client Integration
Ambiguous as it might be, the level at which contractors integrate with clients can be an indication of their IR35 status. From how employees in the organisation perceive the working arrangement, to making use of the employee car-park or attending office parties, to sit outside IR35, differences between the contractor and the employee must exist.
Payment
When a contractor is paid by the hour, day or week, this might suggest that the working arrangement has similarities to employment, compared to say a fixed project fee, which is an obvious indicator of self-employment.
EDIT : Current version based on feedback is here : https://www.contractoruk.com/forums/...ml#post2717673
Once I stop getting substantive feedback I'll replace this version with the final one.
IR35
What is it?
IR35 stands for Intermediaries Regulation 35. Introduced as part of the Finance Bill 2000, it was intended to have two effects:
• Firstly to prevent employers from dodging their NI obligations by making employees redundant on a Friday and re-engaging them on a Monday as “contractors”.
• Secondly to counter a perceived abuse of the Tax system by individuals operating as one-man-bands specifically in order to avoid tax under PAYE, something HMRC describes as “Disguised Employment”.
HMRC have an extremely poor track record in enforcing IR35 in the second scenario and have lost the vast majority of cases they have brought to Tax Tribunals.
How is it applied?
HMRC uses IR35 to challenge the employment status of individuals by testing their contracts and working arrangements against a hypothetical contract of employment. This contract is based on employment law and relies on 3 key factors.
• Supervision, Direction or Control,
• Mutuality of Obligation
• Right of Substitution.
These factors are all recognised in law as being essential to a contract of employment and have been tested repeatedly in the courts. While other circumstances may be considered (See other factors below) for a contract of employment to exist all three must be in effect.
1. There must be Supervision, Direction or Control (SDC)
For supervision to apply there must be someone overseeing another person doing the work to ensure that they are actually doing it and that the work is being done correctly to the required standard. Supervision can also involve aiding or assisting someone to develop their skills and knowledge.
Direction involves someone making another person do their work in a certain way, generally by providing instructions, guidance and advice as to how the work is to be done. Someone providing direction will often coordinate how the work is done as it is being undertaken.
Control is where you have someone dictating what work a person does and how they should go about doing that. This also includes the power to move the worker from task to task as priorities change.
2. There must be Mutuality of Obligation (MOO)
In simple terms, MOO means that in order for an employment relationship to exist, there must be an obligation on a work-provider to provide work and an obligation on the individual to carry out the work. For clients with freelancers working outside IR35 this means that if the client has no work for them to do, they are not obliged to find any nor pay them when work is not being done. For the Freelancer they are not obliged to accept any work from the client nor can they charge the client when work is not carried out.
3. There must be no Right of Substitution (ROS)
In the context of IR35 a right to substitute means a contractually enforceable right for a limited company contractor to replace its representative, at their own cost and subject only to reasonable criteria such as suitability. Provided the substitute is appropriately qualified and experienced the client should not be able to refuse the substitution.
What is changing?
In April 2020 HMRC are changing who is responsible for determining the IR35 status of freelancers providing services via Ltd Companies in the private sector. Up until now it has been the responsibility of the freelancer to make the determination and pay personal and corporate taxes appropriately. This typically involves paying for contracts to be professionally reviewed, documenting working arrangements and taking out insurance against HMRC investigations. Liability for Tax and NI arising from an incorrect decision rests with the Freelancers Ltd. Company. The fact that such insurance is readily available at reasonable cost is an indication of how likely HMRC are to be able to successfully bring a case at the Tax Tribunal.
In April 2020 the decision on status is being moved from the Freelancer to the notional “Fee Payer”, in effect the end client of the Freelancers Ltd Company. The financial liability for an incorrect decision is also moving to the Fee Payer.
Fee payers are not permitted to conduct blanket assessments of status. Each engagement must be decided on its own merits and Fee Payers must provide an appeals mechanism for Freelancers unhappy with the decision.
It is important to note that none of the underlying employment law or existing case law around IR35 is changing. Freelancers properly operating outside of IR35 before this change will still be outside afterwards.
Other Factors
While SDC, RoS and MOO are the key factors involved, other circumstances may clarify the situation in cases of doubt. These include:
Use of Equipment
While the provision of certain vital client equipment is a given, using client laptops, mobile phones and cars, suggests that a working arrangement is perhaps more suited to that of an employee.
Business Presence
For a contractor’s working arrangement to fall outside IR35, it’s important they operate just like any other business. And this includes having a business presence. Insurance, a company website, letterheads, business cards, a registered office address, legal structure and VAT registration could indicate to HMRC that a contractor is genuinely self-employed, and not working through a PSC simply to avoid paying employee taxes.
Number of Clients
Working on a number of different contracts at the same time indicates that a contractor is less likely to be working in an employee-like arrangement, and therefore outside IR35.
Client Integration
Ambiguous as it might be, the level at which contractors integrate with clients can be an indication of their IR35 status. From how employees in the organisation perceive the working arrangement, to making use of the employee car-park or attending office parties, to sit outside IR35, differences between the contractor and the employee must exist.
Payment
When a contractor is paid by the hour, day or week, this might suggest that the working arrangement has similarities to employment, compared to say a fixed project fee, which is an obvious indicator of self-employment.
Comment