Contractors’ Questions: Why am I being paid ‘inside IR35’ on an 'outside IR35’ contract?

Contractor’s Question: I was engaged on an outside IR35 basis – my contract makes that clear. So can you explain why for the first time this month, my submitted invoice was paid as inside IR35? That’s a status I’ve signalled I’d likely accept in light of the new off-payroll rules, but those rules don’t take effect until April 6th. Please advise.

Expert’s Answer: To answer this question, we first need to remind ourselves that a limited company contractor’s IR35 status is not measured by a contract alone.

Working practices are paramount

Yes, it is useful to have a carefully-worded contract. However, in the event of a IR35 status challenge or a visit to the tribunal, HMRC or the tribunal judge will quickly set aside the written agreement and focus on the hypothetical contract between the worker and the end-hiring organisation.

This is often referred to as the ‘working practices’ and it looks to examine a position where if the worker were directly engaged by the end-hiring organisation, would that relationship reflect one of employment? If it does, then the worker is caught by the IR35 rules and furthermore according to HMRC, they and their deemed employer should pay the equivalent employment taxes.

The current IR35 rules are indeed changing on April 6th

Under current IR35 rules, a contractor is responsible for determining their own IR35 status. Here the contractor and their adviser should be diligently considering the wording of their contract and their working practices. Where it can be concluded that there is no disguised employment relationship and that the contractor is truly 'in business of their own account,' they can deem themselves to be outside IR35. If the contractor gets it wrong, then the responsibility and liability rests with them to make things right with HMRC.

If we now roll forward to April 6th 2021, we have a significant shift in the responsibility and liability. The end-hiring organisation is (from the above date) responsible for conducting the IR35 status assessment, and the ‘fee-payer’ – the organisation closest to the contractor’s limited company – becomes liable for any unpaid tax and National Insurance due, should the end-hiring organisation provide an incorrect status decision.

How end-clients see things

While it is the responsibility of the end-hiring organisation to use ‘reasonable care’ when arriving at their status decision, it is easy to understand how risk-averse companies and agencies would want to either eliminate or mitigate their risks, whether reputational or financial.

This is either achieved by the end-hirer taking a commercial decision to avoid IR35 entirely, by simply not hiring limited company contractors – or by offering engagements on a PAYE-basis only.

However, in situations where the end-hirer organisation continues to hire limited company contractors and declares the engagement to be inside IR35, it can often be a shock to the contractor who has previously, themselves, deemed their engagement to be outside IR35.

A tug of war

Suddenly in receipt of inside IR35 payment for services rendered, when they’ve always been outside IR35 according to their own assessment, contractors are understandably asking – ‘surely, something is wrong? Or ‘surely someone is wrong’? Technically yes -- assuming all the facts of the engagement remained identical.

But again we need to understand that a contractor’s desire to be outside IR35 pulls in the opposite direction of the end-hiring organisation, which might prefer the ‘risk-limiting’ outcome to place the contractor inside IR35.

In this situation (your situation by the sounds of it), the contractor has three options really.

  1. Vote with your feet and find a new client.
  2. Suck it up and deal with it.
  3. Or thirdly, challenge the status decision and try to convince the client otherwise.

This third option could either be done formally through the 'client-led status disagreement process,' or by simply talking to the client to try and iron out the inconsistencies.

The outcome

Ultimately, it will doubtless come down to supply and demand. If the client perceives there are plenty of willing contractors to step into your role, they will not think twice about stepping away. Likewise, if you the contractor feels their worth can be appreciated elsewhere, you will likely happily walk away. But if both parties work together, there is no reason why a mutually successful outcome cannot be achieved.

The expert was Chris Mattingly, chief executive of IR35 Navigator.


Friday 26th Feb 2021
Profile picture for user Chris Mattingly

Written by Chris Mattingly

Joining WTT in 2017, Chris co-founded the Contractor Co-op, the UK’s first employee-owned umbrella payroll provider. More recently Chris launched Navigator, an innovative, tech powered advisory platform helping contractors, recruitment companies and end clients navigate the off-payroll working (IR35) reforms.
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