New Off-Payroll (IR35) legislation is coming in on 6th April 2021
It now seems inevitable that the new IR35 legislation (with a new name of Off-Payroll) will be with us from April 2021. It was deferred at the 11th hour in March 2020 due to the Covid pandemic but regardless of the continuing pandemic and economic pressures, the Government has made it clear that there will be no further deferral.
Let’s look at what is changing…
From April 2000 when IR35 came in, the responsibility of seeing whether IR35 applied was up to the individual (Personal Service Company (PSC).
To deal with this responsibility, many contractors had IR35 assessments from specialist experts and this is how Cogent have advised our clients over the years.
From April 2021, the new Off-Payroll rules mean that it becomes the end clients’ responsibility to assess IR35 and carry the tax liability if they get the assessment wrong.
So, it’s not surprising that many end-client organisations are taking the easy way out and either saying that they will not engage with PSCs at all or getting IR35 assessments done either using the unfair and simplistic HMRC CEST test or a variety of other assessment tools.
However, in many cases, these IR35 assessments are turning in INSIDE IR35 results, as the organisations are being understandably ultra-conservative on any tax risk to themselves.
If an end client organisation turns out an INSIDE IR35 result, although the law allows for an appeal process, this is very unlikely to change the result and there is very little the contractor PSC can do.
This INSIDE IR35 result will mean that the end client/agency will deduct all payroll taxes from the payment including the Employers National Insurance part which will mean that the rate you have been getting will reduce by about 8% to allow for that and then that reduced rate will be taxed as an employee.
Overall, there will be a substantial reduction in net income from a well-run tax-efficient PSC of something like 25% (varying with different rates and individual circumstances).
SO, WHAT CAN YOU DO?
- The new legislation does not apply to “Small Companies”. Defined as meeting 2 out of these 3 tests – less than £10.2m turnover, £5.2m assets or 50 employees. This test applies to the group rather than just the company. If you have or can get a contract with a small company then you can continue to be paid gross as now.
- The new legislation also does not apply to a company with no UK connection. So not a UK subsidiary or branch office of an overseas company. So, a contract with an overseas company with no UK connection can be paid gross as now.
- Get involved in discussions now with your end client on what they are doing about IR35 assessments. Focus on strong arguments you may have (see below – defending outside IR35 status) on why your company services should be considered to be outside IR35.
- If you get an inside IR35 assessment, ask if you can continue to invoice through your own company, even though all taxes will be deducted. This method has been called “deemed limited” or “INSIDE IR35-PSC”. This is new and unfair legislation and the ink is barely dry. There may be changes ahead. If you accept work via agency PAYE or an umbrella company, from then on you are legally an employee with no reversal/refund possibilities in the future.
However, if you continue to use your company, then the options of a reversal and refunds remain open. Cogent have developed solutions so ask your Cogent Account Manager about this and how it works.
DEFENDING OUTSIDE IR35 STATUS
IR35 is a mixture of employment law and tax law. It is quite complicated and easy to get lost in fruitless discussions around legal concepts on personal service, substitution, control, mutuality of obligation and others. For example, the ability to substitute another worker to replace you is often argued as being valuable to your IR35 defence.
However, without actually using a substitute, it is hard to prove it is real and unlikely to be an effective defence.
To be effective in your review and discussions with your end client, I would advise you to focus on the following issues/questions which relate to the way you work.
The following has been adapted from articles from specialist contractor law firm, Lawspeed.
- Was your company engaged because the end client needed a specific task and purpose?
- Is your company responsible for completing that task, rather than just undertaking some temporary work for a period?
- Does your company have autonomy when undertaking this task, so that you are task-orientated to get it done properly?
- Is it the intention for your company to do further or different work from the original task, without agreeing to new contract terms?
- Will your company have to ask a line manager what to do and how to do it?
If you can answer YES to the first three questions and NO to the last two, you have good arguments to talk to your end client to show that you are not controlled like an employee and should be assessed as OUTSIDE IR35.
The correct answers to the above questions will help to show that you and your company are not temporary employees but business to business contractors providing a specific service.
It will be useful to agree to a detailed Statement of Work with the end client, showing the specific tasks that your company is being engaged to perform.
An estimated end date to the work is helpful and a quote for the work to be done. These can of course be extended as is the case with many commercial contracts.
End clients have left this process too late again and will now be rushing in the next two months to find a process so that they can deal with the administration of assessing the IR35 status of many contractors before April 2021. You will need to try to push past these templated processes to make your own personal case.
I hope the above is helpful and wish you good luck.
Best regards,
Victor Korman
Managing Director
Cogent Accountants