What contractors' clients asked just before today’s IR35 reform hit

Fieldfisher tax expert Matt Sharp answered the final queries of end-clients on the eve of April 6th’s private sector IR35 reform, in a live Q&A webinar.

A transcript from the law firm’s streamed event has been shared with ContractorUK to reveal to contractors what their clients are asking about them, and the advice being given in response, under the new off-payroll framework – enforceable by HMRC from today.

End-User Question 1:

What if we qualify for the ‘small company’ exemption now, but this changes in the future?

Expert’s Answer: Incorporated businesses qualify for the small company exemption from IR35 provided they meet two of the three following criteria:

  1. annual turnover of less than £10.2 million;
  2. a balance sheet of less than £5.1 million; or
  3. (iii) 50 employees or fewer.

Unincorporated businesses need only have a turnover of less than £10.2 million to be exempt from the new off-payroll rules.

If you are an exempt ‘small company,’ you need to keep your exempt status under constant review. If your business status changes so that you no longer qualify for the exemption, your window for complying with IR35 differs depending on whether your business is incorporated or unincorporated.

Incorporated

If your business is incorporated, you need to have two consecutive financial years where your business falls outside the small company exemption before you start applying IR35 rules.

Unincorporated

If your business is unincorporated, then you need to start applying the IR35 rules from the start of the tax year following the calendar year during which you fell outside the exemption.

This can be quite tricky to get right, so we recommend seeking the advice of a tax expert on your exemption status and if/when you need to start applying the new IR35 rules.

End-User Question 2:

What happens if we have contracts that span April 6th 2021?

 Expert’s Answer: Not all contracts will end neatly at the end of the tax year and some businesses will have contracts caught by IR35 that span the reform implementation date on April 6th 2021.

In these situations, the key to ensuring you are compliant with IR35 is that the new rules will only apply to payments for work carried out on or after Tuesday April 6th 2021.

If the work was completed before April 6th 2021, but the payment was made on or after that date, this will not be non-compliant.

However, it is important to make sure that the date of work is clearly documented (e.g. in the invoice), in case HMRC queries the payment.

End-User Question 3:

How will our HR teams or hiring managers know if the incorporated businesses used by our contractors are caught by IR35?

Expert’s Answer: There is a misconception that IR35 only applies to contractors who work through their own Personal Service Company (PSC). i.e. their own limited company.

However, even though PSCs are by far the most common structures for intermediaries, any intermediary – including limited companies, agencies, or partnerships – through which a worker performs services for an end-user can be caught by IR35.

It is worth noting that for a PSC or limited company to be caught by IR35, the worker providing services or a person connected to them (such as a spouse) need only have a 'material' (more than 5%) interest/shareholding in that limited company.

Unfortunately -- if you were hoping not to be affected by the new framework, HMRC has deliberately set the threshold quite low to ensure most intermediaries are captured by the new rules.

End-User Question 4:

How do we know, definitively, if we are the end-user?

Expert’s Answer: Sometimes referred to as the ‘end client’ or simply ‘client’ by HMRC (and by contractors)– the end-user for the purposes of the new IR35 framework is the person or entity in receipt of the worker's services.

In complex supply chains, it is not always clear who the end-user is for the purposes of IR35.

There is some guidance on the government's IR35 web pages to help identify different entities in a supply chain. But essentially the end-user is the entity that looks most like the employer in a relationship – i.e. the entity who would direct and control the worker.

End-User Question 5:

What should I do to prepare for the IR35 changes even if we don’t think we’re affected?

Expert’s Answer: Definitely find out for sure and don't wait for HMRC to tell you!

The key point is that, from April 6th 2021, all businesses using off-payroll workers must take action because of the revisions to IR35. If your organisation engages off-payroll workers do not take the risk of assuming the new rules do not apply to your company.

Of course, if you think that your operation may be covered by the ‘small company’ exemption, check your records carefully against the criteria set out above (in my answer to Q1).

Webinar Participant Question 6:

If we’re only now getting up to speed with IR35 reform, what should we do, even at this very late stage, to get a handle on reflecting the new off-payroll rules?

Expert’s Answer: It’s not clear if you’re an agency or client or other supply chain party. But first and foremost, I’d recommend that you ascertain your role in the supply chain.

 All businesses that operate in supply chains where off-payroll workers are involved should ascertain what their role in the chain is and what obligations under the new IR35 framework apply to them (Are you a ‘fee-payer’ for example?). This requires supply chain mapping and working out which entities sit either side of you.

Step two is to check out what resources are available on government and advisers' websites to assist you.

Step three; check your processes. Once you have collected your data, think about how you are going to process it and communicate your decisions to others in the supply chain.

Step four; get your mindset correctly adjusted. Remember -- IR35 reform is not a one-off compliance exercise. As of April 6th 2021, affected businesses need to regularly (at least once every 12 months) review their working practices and check whether there have been any changes that affect their IR35 compliance status.

Webinar Participant Question 7:

What’s been overlooked, even by those end-hirers who think they’re well prepared for Tuesday April 6th and beyond?

Expert’s Answer: Well, we’d recommend that you don't forget about employment law! It might sound obvious but if you or your staff start treating a worker as an employee for tax purposes, they may assert employee or worker status for employment law purposes and make a claim for employment rights – such as holiday pay, sick pay, and pension contributions. This situation needs to be carefully managed, even once your team has a foundational understanding of how individuals at your workplace do not warrant ‘one-size-fits-all’ treatment.  

Webinar Participant Question 8:

We’re a consultancy firm with a number of PAYE employees. We provide our staff to fulfil specialist interim roles but this is drying up rapidly due to IR35. We can't allow employees to be taxed at source based on the day rate charged by the company. Is there a way of applying for ‘inside IR35’ roles but then forcing a review of the role’s actual fulfilment? We would supply details to prove we are a fully operating firm and not just a 'one-man band' services company.

Expert’s Answer: The newly enhanced scope of IR35 is not an end to consultancy-client relationships. However, it has caused confusion and prompted some end-users to become very cautious about using PSC contractors provided by consultancies.

As long as the worker providing the services is subject to PAYE, then the relationship will be IR35-compliant.

Transparency is key, and consultancies should make clear to clients that their workers are their employees for tax purposes and that there is no risk that they (the client) will be caught by IR35 by using contractors' services, because all relevant tax is being collected through PAYE. In all such relationships, the contract of engagement should ensure a flow of information between all concerned and make clear who is responsible for operating PAYE.

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Written by Matthew Sharp

Matthew is a senior associate in Fieldfisher's Dispute Resolution Group, specialising in contentious tax matters. He has broad experience advising on a range of direct and indirect taxation disputes and works with all industry sectors, and both companies and private individuals. He has particular expertise advising on employment taxation issues, including IR35, and property taxation issues, including SDLT and Business Rates. 

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