Contractors’ Questions: What if I’m inside IR35, was outside, and now face a Fixed-Term Contract?

Contractor’s Question: My contract ends on March 31st. My client has deemed my role via the CEST tool as inside IR35 which, ultimately, will mean I will probably leave. The project is closing down and I would like to see the job through as I like working there.

I'm unsure that the client staff who make these decisions have considered it but if after March 31st they were to make the role a Fixed-Term Contract (FTC) for, say, 18 months (I don't think the project should go on more than this length of time), would IR35 then enter the equation? Would this also flag up to HMRC? I realise that under an FTC, the tax and NI would be akin to a regular employee but us contractors would also get normal employee benefit, presumably. Please advise.

Expert’s Answer: I am sorry to read that you feel you may have to leave because of the proposed new Off-Payroll rules and sorry too, because of the impact upon your professionalism in wanting to see the project through to the end.

There are no easy answers here not least because this reform has not been confirmed for commencement on April 6th. There are lots of things to consider before you can decide what is right for you personally.

Your first priority is…

The first thing to do is to establish the bottom line. Speak to your accountant to find out what your net income will be. And don’t forget, if inside IR35, then there is no relief for Travel and Subsistence (T&S), so you must factor in these costs. Can you afford this?

Next, consider that everything connected with these new rules concerns the end-client and the amount of risk they are prepared to accept. Many large companies (especially) do not want to increase their headcount. Arguably if they offer a FTC now, then perhaps this should have been the original offer. End-clients are also worried about employment rights claims.

If you take the FTC, then no, IR35 does not come into the equation. Please be aware, though, you will not necessarily be entitled to ‘normal’ employee benefits. Many statutory benefits are not applicable until two years have elapsed.

HMRC will know you’ve moved from outside to inside IR35

HMRC has stated that they will not undertake targeted investigations for those moving from outside to inside IR35, unless they suspect fraud or criminal activity. It is not clear if a tax collecting body can make such a statement and stick by it. However, the statement is subjective, and wide, and does leave the door open to them.

What is certain, is that HMRC will be able to clearly see who has moved from outside to inside IR35. The risk here (prior to April 6th) is yours, and it is important to ensure that you have taken “reasonable care” on all your past engagements -- not just this one. HMRC usually goes back four years, but this can be extended to six years if you, or another party such as your accountant, has not taken “reasonable care.”

Whatever you decide to do, I recommend that you review past engagements to ensure you keep any paperwork to support an outside IR35 position.

Do you agree with the CEST output?

I note that you state the client has deemed your “role” as inside IR35. Under the new rules, the client has to show that they have taken “reasonable care” in making IR35 status assessments. Unless they have taken account of  your personal factors, the written contracts and the reality of the day-to-day working practices, as confirmed by an employee that you have day-to-day contact with (not an unknown face from HR), then a role based assessment is unlikely to meet the “reasonable care” requirement.

Although time is running short, you should seek full details of what was put into the CEST tool and ask for the reasons that IR35 applies. Many engagers are offering an appeal process at this stage. Unless you think the client may be right to put this inside IR35, you should challenge the result, especially if you have evidence of, say, contract reviews and opinions. You may have personal factors that put the case outside IR35 or have very different working practices to those in a similar role.

Many IR35 specialist firms offer second opinions and help with these appeals.

What is your client offering YOU?

You need to quickly establish what the client is offering. Many are making commercial decisions to not engage those working via a PSC throughout the contractual chain. Some are insisting you work via an agency and some insisting that you work via an umbrella company.  The FTC arrangement may be a non-starter, but you do need to know what the options are.

Summary

You need to act fast now and do the following:

1. Establish what your pay is likely to be and consider the extent of any T&S.
2. Establish the client’s position and what they will or will not accept.
3. Consider challenging the role based CEST result.
4. If your client insists on agencies and umbrellas, they may have a list of suppliers that they work with (their ‘PSL’). If so, talk to these people to establish fees and benefits.
5. Take this as an opportunity to collect paperwork and tidy up your past position.

Good luck!

The expert was Kate Cottrell, co-founder of status specialists and IR35 advisory Bauer & Cottrell.