Contractors' Questions: How can my IR35 status be set before I even begin?

Contractor’s Question: If IR35 is very much about working practices as indicated here, then how can it be that adverts for public sector IT roles already have the working practices decided (and therefore the IR35 status set), before the work is practiced?

Who’s to say I might operate differently than the end-user anticipates, and such differences could move the IR35 status from inside to outside, or vice versa, couldn’t they?

Expert’s Answer: The first thing to note is that there is different legislation in respect of contractors working in the public and private sectors.

Under the original Chapter 8 Income Tax (Earnings and Pensions) Act 2003 legislation (known as IR35, which the article you link to refers to), liability for employment taxes lies with the PSC that provides the services of an individual to a client. As such it is for the PSC to determine whether IR35 applies (or that an arrangement is ‘caught’) meaning full PAYE & NICs must be paid on payments for the services. Relevant factors will include working practices on the assignment, the degree of mutuality of obligation and, importantly, the extent to which an arrangement is a genuine project.

From April 2017, new measures have applied to assignments for a public authority. These are set out in Chapter 10 Income Tax (Earnings and Pensions) Act 2003. These new rules posit liability for any deemed employment tax debt with the party paying the PSC (referred to as the ‘fee-payer’), thus taking the primary responsibility for making the assessment away from the PSC.

There is also an obligation on the hiring public authority to indicate whether an assignment is caught by the new rules or not -- it can use the HMRC CEST tool to assess this.

A fee-payer agency would be prudent to follow the hirer’s determination, particularly where the assignment is deemed to be ‘caught’, as to ignore this would leave it potentially liable to pay the deemed employment taxes itself.

The questions on the HMRC CEST tool reflect similar considerations to those used for IR35. It is simply that because liability for any deemed tax debt has moved, the rationale for achieving a ‘correct’ determination by the involved parties differs.

The new rules and the development of the tool have done little to assist in explaining the law in this area. As your question indicates, by applying a ‘snapshot’ approach to the status of an arrangement, it fails to provide for changes in circumstances, although HMRC have indicated in guidance that any major change in circumstances should prompt a revised determination. However, conducting a new assessment every time that the circumstances of an assignment alter (e.g. the location of services changing) is clearly impractical and administratively burdensome.

The expert was Ben Grover, senior legal consultant at Lawspeed, a recruitment law firm.

Monday 20th Nov 2017