Cogent IR35 and Off-Payroll Tax Defence Tool
Victor Korman, Managing Director of Cogent Accountants, has had an in-depth look and studied the proposed new legislation on IR35 and the Off-Payroll Tax and has detailed his thoughts and findings in the article below in order to explain the new legislation and provide a Defence Tool for contractors.
New legislation on IR35 is due to come into law in April 2020. It is important for all in the freelance contracting work chain to understand what the new legislation is and equally what it is not.
The new legislation is NOT a new way of assessing the employed or self-employed status of a freelance contractor. The law is essentially the same as it has been for 20 years since IR35 came in to play and the same criteria needs to be reviewed to make a status assessment.
What IT IS is a switch of the liability for IR35 taxes from the freelance contractor’s own company to the end client or agency fee payer. In HMRC’s own words, they have not been winning in the way they have been prosecuting IR35. By switching the liability to the fee payer, they believe they are likely to collect more in taxes from risk adverse fee payers, much as PAYE and Construction Industry Scheme (CIS) deductions do. HMRC hopes to sit back and let others do the work in paying the IR35 taxes. In order to do so, they have created this new legislation which is a one size fits all solution that ignores the specifics of each individual freelance contractor’s position. Government is powerful and if they don’t like the results coming out of the courts as decided by experienced learned judges, they can just change the law putting the very complicated legal arguments into the hands of non-expert HR departments who as mentioned will be looking to avoid risk and potential tax liability.
We at Cogent have joined in with Contractor Calculator in the #StopTheOffPayrollTax campaign as this legislation is aggressive, not well thought through and will affect the economic power and flexibility of UK plc at almost the worst possible time. It should be stopped at this crucial economic time and considered properly. Government can be good at making changes that serve an immediate political or economic outlook, without properly understanding the new legislation (how many MPs can understand or currently make the time to understand this difficult tax) and considering the unintended consequences of their actions. “Forgive them Father, they know not what they do”.
To make your voice heard, there is an online petition facility which allows anyone to submit details of a cause and, if 100,000 signatures are received, it will be considered for debate in Parliament.
Sign the petition here: https://petition.parliament.uk/petitions/262354
However, the purpose of the Cogent IR35 Defence Tool is to be pragmatic and in the likelihood that the legislation will be with us from April 2020, it sets out to provide our clients with an understanding of how the legislation is likely to affect them and what they can do about it.
How off-payroll IR35 will work from April 2020
From April 2020, the end client will have the responsibility to determine the employment status of the contract with the worker. They will decide if the contract should be IN-IR35 or OUT-IR35. They will then have to pass that status determination with explanations as to how they reached that decision to the agent and the worker. The agent who pays the company doing the work (your personal company) will, in the case of an IN-IR35 status determination, need to deduct normal tax and NI as if you were an employee or, in the case of an OUT-IR35 status, pay gross as has been the case up to now.
However, as the client or agent will from April 2020 bear the tax liability if they get the status determination wrong, they are very likely to be biased towards assessing status the way HMRC has recommended. They are not IR35 experts and are being forced by this new legislation to try to make a decision on the correct treatment of IR35 or bear the heavy tax consequences themselves. So it is likely they will play safe. However, the legislation says they must take reasonable care in making the status determination, although there is no definition or guidance as to what they must do to pass that duty of care. So it is possible that some end clients will be risk-averse and look to play safe by assessing IN-IR35 as a default.
So here is a plan of action for defending your OUT-IR35 status (as advised by our IR35 specialists):
- Take the initiative
In the event that your client or recruitment agency hasn’t been in touch regarding IR35 changes, you can take the initiative and reach out to them with a view to discussing their plans for reform. With a clear idea of how your client and agency intend to administer IR35, you will be in a position to decide whether you want to continue working on that specific contract post-April 2020 or source one with an engager that will assess status accurately.
- Communicate with your fellow contractors
The saying ‘two heads are better than one’ is certainly applicable here. As a contractor, it’s well worth getting in touch with other independent professionals working with the same client to find out if they have held any talks with the engager about IR35.
Consider approaching your client together as a group to stress how important it is that they prioritise well-informed status decisions. If a business understands the implications that blanket IR35 assessments, for example, will have on its ability to attract contractors, there is a chance that it will reconsider its approach.
- Confirm your arrangements
Explore the possibility of securing a Confirmation of Arrangements (CoA) document. Signed by your client, a CoA effectively confirms that all parties in the supply chain (including the recruitment agency), are in full agreement of a contractor’s IR35 status.
Granted, a CoA could be tricky to obtain, given it will soon be the client who carries the liability — much like in the public sector. That said, should you achieve this, theoretically it will become difficult for your client to change your IR35 status on or after 6th April without good reason. Please see below a link to get a template for the Confirmation of Arrangements document:
- Prioritise ‘Substitution’
The right to provide a substitute in a contract is often focused on in IR35 investigations. And while one factor on its own doesn’t typically deem you inside or outside the scope of the legislation, it’s worth ensuring your contract has a genuine right of substitution. Better still, actually exercising this right to provide an able substitute will strengthen your case for belonging outside IR35.
Given engagers are being advised by HMRC to use the taxman’s very own Check Employment Status for Tax (CEST) tool – which may wrongly automatically class a contractor inside IR35 if there is no substitution clause – it’s important to ensure your contract allows for this.
- Stay aware of ‘Control’ and ‘Mutuality of Obligation (MoO)’
While Substitution is important, that’s not to say you should ignore two of the three other key status tests, Control and Mutuality of Obligation (MoO). To ensure you have the best possible chance of being considered outside IR35, it’s also crucial that you are able to show you are not under the direct control of your client, and there is no mutual obligation for the client to provide paid work and for you to accept it.
- Seek independent advice
To strengthen your IR35 position, consider having your contract reviewed by an IR35 specialist who will be able to offer objective advice. Armed with an in-depth status review carried out by an expert with no financial gain on the outcome of the assessment, you will be better placed to head off any potential risk-averse decisions that might be made by your client. Clients of Cogent can obtain an enhanced IR35 status assessment from specialists QDOS at a discounted price of £85+VAT (normal rate £125+VAT). Contact us if you wish to carry out this IR35 assessment.
- Demonstrate you run a legitimate business
Make it clear that you operate as a legitimate business – an important albeit not typically definitive factor taken into consideration when determining IR35 status. From taking out business insurance to having your own office address, company website and even stationery, it’s vital that you’re able to demonstrate to your client and, if required, HMRC, that your company is not a vehicle used to disguise employment.
As the clock ticks down to the arrival of private sector reform, it’s important that you take these steps in an attempt to protect your IR35 status regardless of the fact that from next April you will not be the party tasked with setting it.
We at Cogent are happy to come out and see you and colleagues to discuss what you can do about the off-payroll tax legislation. Call us and arrange a free appointment for an expert opinion. NOW IS THE TIME TO PREPARE.
***HELP STOP THE PROPOSED NEW IR35 LEGISLATION***
click https://petition.parliament.uk/petitions/262354 to sign the petition NOW!!
Please sign the petition now and ask all your friends and family to do the same. The more signatures, the more chance the legislation can be stopped.