IR35 assurance process – a contractor's guide
Editor’s Note: The following new guidance article (as of Feb 2016) on the IR35 assurance process for public sector contractors is an updated version of this guidance article from 2012.
This updated version, below, is necessary since HMRC withdrew a key part of the process – the Business Entity Tests (BETs), leaving contractors with queries about how to carry out the process without the BETs. A Cabinet Office policy note about a year ago (March 2015) does not appear to have solved those queries.
So here, exclusively for ContractorUK, IR35 expert Kate Cottrell, co-founder of employment status specialists Bauer & Cottrell, offers advice to contractors and other off-payroll workers providing services to the state sector who are being asked to provide assurance about their IR35 status and tax affairs.
Procurement Policy Note 08/15 – Tax Arrangements of Public Appointees
This PPN (linked above and referred to from here onwards as ‘the guidance’) replaces the Cabinet Office note issued back in 2012. It was produced to reflect the withdrawal of the BETs (Business Entity Tests) by HMRC.
The guidance goes much further than the original and requires public departments to determine the employment status of all their off-payroll workers, regardless of how the worker is engaged and to ensure that there are clauses in the relevant contracts to enable the department to request an assurance. Consequently, the guidance (explained in this article) affects all contractors where public sector money is involved.
What does it mean for me?
Contracts have been changed to include clauses giving the right for engagers to seek assurances and information and evidence to show that income is being treated correctly for tax and NIC purposes and especially with regard to IR35. Those workers operating through umbrella companies or on agency payrolls will have to provide copies of their pay slips. If you’re a contractor, you could risk having your contract terminated if you do not comply with the assurance process and failure to comply could result in the engager informing HM Revenue & Customs.
How does the assurance process work?
The guidance (on page 6) states the following:
“Worker working through their own limited company and PAYE not operated on total income of limited company for their work.
Departments may seek assurance in these circumstances as follows:
Where the worker is engaged through their own limited company (a personal service company) and not withdrawing all the company’s income from the Department under PAYE (as set out above) they will need to provide evidence of one of the following:
a) If the worker feels that they are outside the scope of IR35, they will need to provide assurance for example, following a contract review by HMRC’s independent IR35 helpline. The worker should be able to provide evidence of a contract review to say that they are outside the scope of the IR35 legislation at the 6 month point. If the terms of the contract remain the same, the assessment of the service company will not change for the duration of that contract.
b) If the contract is within the scope of IR35, the worker can provide evidence that their company is operating the IR35 legislation on the payments received from the Department. This can be evidenced by the worker providing a “deemed employment payment calculation” and showing the tax and NICs liabilities have been met in full. The Deemed Employment Payment is a calculation that requires the worker’s company to consider all the income of the PSC/intermediary for the year from a particular contract that is within IR35, calculate a “deemed employment payment‟ and pay Class 1 NICs and tax on that deemed payment.
The deemed payment calculation can be accessed online at http://www.hmrc.gov.uk/ir35/ir35.xlt. The legislation only requires the individual to make this payment at the end of the tax year, so it will not be possible to provide assurance until this point – the individual will need to indicate that they are intending to do this when assurance is sought and commit to meeting this requirement at an agreed later date.”
So, in summary for those workers inside IR35, you will need to provide evidence that you have paid up even after you have left the engagement. For those outside IR35, you need a comprehensive IR35 contract review either from HMRC or an independent provider.
Contractors beware -- this is NOT a simple box-ticking exercise
We have seen numerous cases where the public sector departments are no longer accepting, at face value, third party assurance e.g. from accountants or other advisors where they are simply stating that the individual is outside IR35. As these departments face significant cuts to their budgets, this is not surprising and the guidance goes on to state the following:
“If a Department is concerned that the results of a contract review, whether conducted by HMRC or an independent body, do not adequately reflect the reality of the contract, the Department may wish to consider stipulating in advance the information a worker should disclose in a contract review. A Department needs to ensure that it has systems in place to enable it to have confidence in the results of any contract review which are supplied. Information required by the HMRC Contract Review Service may be of assistance here.”
It is also apparent from our experience that Monitor, the organisation that oversees the NHS, is looking to cease the use of limited company contractors altogether. However, those who use reputable and creditable IR35 contract review services will be provided with an assurance certificate for presentation to public sector engagers. The best providers of this service will also offer assistance and further guidance to you. Prior to the issue of an assurance, the best providers always seek a signed confirmation from the end-client regarding the working practices. There is no point in taking a ‘quick look’ at a contract and saying ‘all is well.’
What should contractors bear in mind?
- You may be given strict timescales to provide evidence and it is unrealistic to expect you to obtain a HMRC IR35 contract review in just a few weeks. Many contractors are reluctant to use the service. Some IR35 insurances are void if the contractor uses the HMRC IR35 service. The reality is that the HMRC service is entirely confidential and independent of HMRC compliance activities. However in the event of disagreement as to the IR35 status, the request for an opinion could lead to a full blown tribunal hearing.
- You cannot ignore an assurance request.
- Your chosen IR35 contract review provider should have taken full account of the new assurance processes and advised you accordingly. You should also always seek their opinion on your IR35 status in writing.
- The provision of information for the assurance process is the responsibility of the worker.
- There is evidence of departments seeking the full reasoning behind an ‘outside IR35’ opinion and an apparent mistrust of evidence where a comprehensive review/assurance has not been undertaken.
- Some departments are assuming that every worker is inside IR35.
For anyone providing services to the public sector and claiming an outside IR35 position, a comprehensive IR35 contract review is vital and it should be undertaken, ideally before starting the contract. It is not possible to simply ignore IR35 when working in the public sector. Your engager will be chasing you for an assurance and will think nothing about reporting you to HMRC if you fail to provide the assurance. It is not worth the risk.