IR35 and off-payroll working FAQs: eight need-to-knows

Although it has been in place for well over 20 years, IR35 still causes confusion for many contractors trying to navigate the legislation.

Further to us addressing an initial batch of commonly posed queries tied to this coming Saturday’s IR35 offset, I want to provide here answers to more general IR35 and Off-Payroll Working FAQs, writes Alex Seal, tax consultant at Markel Tax.

1. Does the length of contract determine whether contractors are inside IR35?

The length of engagement is not a determining factor for IR35.

However, duration can have some bearing when the courts are considering if IR35 applies to an engagement.

That said, it is not the length of engagement itself which can cause an issue, but the relationship between the parties during that time.

In the case of Airfix v Cope, the tribunal held that there was a “continuing relationship” for seven years which had evolved over time to one of mutual obligation between the engager and the individual -- such that at some point during the period any independent relationship that had existed at the start of the engagement had acquiesced to one which was more akin to employer-employee.

The longer the period of engagement the more likely it is that the commerciality and independence which had been at the forefront when the contract started will start to ‘slip’ (as many things do over time), and you, the contractor, may become more “part and parcel” of the client organisation.

This is why it is important that the parties conduct themselves independently and reacquaint themselves with the terms and conditions of engagement (preferably by resigning and reconfirming contractual provisions every 6-12 months). If those terms and conditions demonstrate a relationship outside IR35, then the length of time the services are provided cannot alter that fact.

2. What are ‘in-business’ factors and why are they important?

Case law (notably Market Investigations v Minister of Social Security) has determined that there is no exhaustive list of ‘in-business’ factors and HMRC’s guidance is consistent with this.. As the tax department says in ESM0515: “This is not a mechanical exercise of running through items on a check list” .

But factors such as providing your own equipment, hiring additional helpers, financial risk, and the opportunity to profit are important considerations in demonstrating you are ‘in business on your own account.’

Although considered ‘secondary factors,’ and not determinative of IR35 in isolation, these in-business factors play an important part in establishing the correct application of IR35 to a relevant engagement. This has been seen in some of the most recent, high-profile ‘presenter’ cases.

While we would not recommend complete reliance on in-business factors alone, we would recommend any evidence is kept over the years of any expenditure incurred in operating your business and that any financial and commercial exposure is evidence in your contract as much as possible.

Most importantly the intention of the parties has been highlighted by the courts as a significant factor demonstrating an independent relationship. Any contract should therefore make this abundantly clear.

3. My client is overseas, so am I exempt from IR35 / the off-payroll rules?

This is a common misconception of the IR35 reforms.

Firstly, it is important to establish if the client has a UK presence i.e. do they have an office or link in the UK? If the answer to this question is ‘yes,’ then the client will have to consider whether the so-called Chapter 10 rules (the OPW rules) apply.

If the answer is ‘No,’ then while the client does not have to consider OPW, you would need to consider whether ‘old’ IR35 applies – the so-called Chapter 8 rules. Otherwise, your limited company could be held accountable for any potential liability.

4. If my client is a medium/large company and has an obligation to provide me with an SDS, does my company hold any liability?

The legislation at Chapter 10 ITEPA 2003 provides that where the client does not meet the definition of being a ‘small company,’ then they are responsible for determining the IR35 status of the engagement. It is then the ‘fee-payer’ i.e. the party in the chain that pays your limited company that has any potential liability for IR35.

If the client has not taken “reasonable care” when producing the Status Determination Statement (SDS) then the liability would move up the chain to the client.

Under the Chapter 10 IR35 legislation, in ordinary circumstances, your company holds no liability for incorrectly assessing the IR35 status or for the subsequent liability.

5. Why can’t I provide services as ‘interim director’ to my client outside IR35?

Directorship duties would fall within the position of an ‘office-holder.’

Office-holders are specifically dealt with in both Chapter 8 and Chapter 10 frameworks, holding that the services of an office holder automatically fall within IR35 and therefore the normal tests of status do not apply.

If all the services provided by your PSC are that of an office-holder, then IR35 would automatically apply and deemed payment would need to be operated.

If it is a case that only some of the services are that of an office-holder, and some are consultancy, then it may be possible to separate out these services under two separate supplies – effectively providing two separate services to the client simultaneously under separate contracts.

Care would need to be taken that each contract specifies the parameters of each engagement, and the income from each would have to be dealt with separately.

As an aside, even without operating via a limited company (i.e. direct-to-client as an individual) office-holders are subject to tax and NI on all income paid to them.

6. My contract states that I can send a substitute, but this has never happened in practice, does this matter?

In reality, you might not ever send a substitute but this is not the principle which is important in law.

If you have a right to send a substitute, according to case law this right is sufficient to demonstrate that personal service cannot exist.

However, as always with IR35, it is not quite as simple as that! The right of substitution must be genuine and must not be unreasonably fettered (the courts have confirmed skills, qualifications and experience do not overly fetter a right of substitution but any other factors may do) .

Put simply, a genuine and not unreasonably fettered right of substitution is evidence enough, however an arbitrary addition that is never meant to be used and is only inserted merely to avoid the IR35 legislation will never stand up under scrutiny.

7. Can I claim travel expenses to my client’s site while on an inside IR35 engagement?

If you are contracting under an ‘inside IR35’ engagement, you are treated in essentially the same way for expenses as an employee of the client would be.

This means that the client site would be considered a “permanent place of work” and therefore travel expenses to and from that place of work would not be claimable.

But if you travel from the client-site to other sites or their clients, then these would likely be able to be claimed under HMRC’s normal expenses rules.

8. If I am determined inside IR35 do I have to ‘go’ umbrella?

If you have received an SDS stating you are inside IR35, then it doesn’t automatically mean you should now work via an umbrella company instead of your PSC.

Many agencies offer the option of umbrella company for contractors determined inside IR35, partly as it’s advantageous to agencies because it effectively means they would not need to operate the ‘deemed payment’ calculation required for fee-payers (as with an umbrella company , it is not an “intermediary” for the purposes of the IR35 legislation).

Whether umbrella company employment is an advantage to you will depend on your personal circumstances (and some number-crunching). By contrast, operating via your PSC would mean you are paid the deemed payment calculation and there are no further deductions once the money hits your company. But you would most likely still need the services of an accountant for company returns and the like!

By being employed through an umbrella, your PSC accounts would be nominal or even NIL, so you would simply receive a payslip from the umbrella, although be aware the money paid by the agency to the umbrella would still suffer Employer NI from the umbrella company as well as other umbrella company deductions.

Thursday 4th Apr 2024
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Written by Alex Seal

Alex provides support in defending taxpayers against HMRC challenges on IR35. Alex also provides consultancy to clients and accountancy practices on a range of areas within the employment status industry such as IR35, the impact of the new IR35 private sector legislation introduced in April 2021, compliance with the new IR35 legislation, outsourced providers and sole traders. Alex is a member of the Association of Taxation Technicians (ATT), having completed her entry requirements in 2020.
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