New IR35 legislation comes into force
I’m a partner at Scroll, where we’ve been hard at work sorting through the implications of the new IR35 legislation.
This is a personal interpretation of the new IR35 rules and existing employment ones. I thought it might help to set them out, to order my thoughts and invite you to comment if your own experience has led you to different conclusions.
I’m neither a lawyer nor an accountant, so don’t take this blog as advice!
IR35 – what you should do
IR35: the big date in my calendar is 6 April 2017. Or rather, 5 April, because everything must be done by then. I’ll need a holiday on 6 April…
These are the things I’d suggest doing.
Review your contracts
Review all contracts you have that are still live (you’d be surprised: you may find that a contract you stopped working on a while ago is still ‘live’ as it still has time to run on it – eg if you work through an agency). Request to end all contracts that currently have end dates later than 5 April and start new ones on or after 6 April.
Take the HMRC IR35 test
Take the HMRC IR35 test, record the results, and share them with the next person in the chain above you (the body that pays you). If you’re paid by your own limited company or PSC (personal service company), you will want to share it with whoever pays your company or PSC as well (so in the case of contractors working with Scroll, send it to me!) Keep the results of the test for your files in case you’re ever investigated by HMRC, and take the test regularly (at least every time you sign a contract extension or a new contract).
Look at insurance
Consider taking out insurance against tax investigations.
What does the new IR35 legislation mean?
Under IR35, if HMRC have reason to believe they’re not receiving all the taxes they’re entitled to (eg employer’s National Insurance) because you ought to be an employee on payroll rather than a contractor, they can ask for back payment on projects for the duration of the contract, including pre-6 April. That’s why it’s best to end current contracts and start new contracts on or after 6 April.
Do the new IR35 rules apply to you?
At the moment, the new IR35 rules apply only to work done for end-clients who are in the public sector.
By end-clients I mean the people for whom you perform the work – the owners of the websites and content you work on.
In many contracting chains or situations there’s an overlap with employment rules, so it’s worth reviewing all contracts not only for IR35 (and the question of who pays tax and how much) but also to make sure that you are indeed a contractor and would be considered such by HMRC.
How to work out if you’re an employee or a contractor
You probably ought to be an employee if you meet a number of the following.
- You’ve only one client and you work with them so many days every month that you’ve not got time to work for other clients.
- Your contract has lasted 2 years.
- Your contract has been renewed on a rolling basis.
- You work fixed hours and in-house.
- You’re treated as one of the staff, eg you get invited to away-days/team building exercises and take part in training for free.
- You use the office’s subsidised canteen.
- You review other people’s performance.
- You manage people
- You have little control over how you do your work.
How to test for employment
There’s a good IR35 compliance testing tool which is free to use (see the resources section at the end). It’s not an official test but it’s useful as the comments are clear.
You can’t use it as proof, only to guide your own thinking. It lists many more factors than I’ve done above – the ones I’ve mentioned are just the ones I’ve noticed as being the most common among Scrollies. You can also use the HRMC tool to check for employment status.
If you think you ought to be employed you should talk to your client about employing you, go through an umbrella company, or set up a limited company to trade through (if you’ve not done so already) and revise your ways of working so that you are truly operating as a contractor.
How to test for IR35
Take the HMRC employment status for tax test and answer it not in relation to your contract but in terms of how you actually work.
That’s what counts. An investigation would look beyond your contract up through the chain of contracts (eg if there’s an intermediary like an agency along the way) and would look especially at your working practices.
Your contract can go straight in the shredder if it’s not borne out by your working practices.
If the test says you’re outside IR35, then that’s good; make sure you continue to work in a way that is outside IR35. You’d be wise to retake the HMRC test regularly and file the results in case of an investigation. (Further down the page I’ve listed a few things you might want to ask your end-client to allow you to do and that you may want to include in your contract too.)
Alternatively, you could choose to go ‘inside IR35’ and go on the payroll. You can do this, either as an employee of your client (the agency or consultancy that you invoice every month, eg Scroll, and that holds a contract with the public-body end-client). You could also do this via an umbrella company. Your take-home rate would be lower but you can at least be sure that HMRC will be receiving its full and accurate share of taxes.
Actions that might help you work outside IR35
Here are a few things you might want to ask your end-client to allow you to do. You may want to include these in your contract, too.
Don’t be just an extra pair of hands
Rather than engaging your services generally (eg to stop a temporary gap in the project team’s staff) clients should be drawing on your expertise to complete specific tasks. They’re being called ‘work packages’ or ‘deliverables’. Ensure your contract includes them. You may well need to help to draft them yourself.
Delegate to a substitute where necessary
To be a true contractor you need the chance and flexibility to build your network and keep it sweet. You may need to juggle a contract that’s just starting with another that you’re completing. So, you may well need to work remotely or delegate your work to someone who’s suitably qualified in order to free you up.
Check your contract has clauses around substitution. Above all, discuss this with your clients. You may want to line up your substitute now so that any security issues can be sorted ahead of time.
Explain things to your end-client
Explain why you need flexibility as a contractor: hours, location, using your own equipment and email address. Emphasise the differences between contractors and staff to your clients and explain what the benefits are to engaging contractors (no overheads, expertise in short bursts, low risk, legacy of handover and training, etc.)
Things could change!
Watch out! The rules around liability and IR35 are confusing and might change again soon. The onus to declare a role as being inside or outside IR35 falls on the end-client for now (eg a government department). However, what they say is only to be interpreted as a recommendation: it isn’t binding.
The liability to ensure the declaration of IR35 status is correct could fall on the agency that engages your services or even on your own limited company as the next in the chain from you.
Everyone’s being cautious about IR35 – and you should too
I’ve noticed that everyone at every stage of the chain is being cautious, and rightly so. Even if an end-client isn’t responsible for ensuring you pay the right amount of tax, they won’t want egg on their faces if exposed as having engaged the services of someone who’s not paying their taxes correctly.
Agencies and consultancies like Scroll are being very cautious in case the blame falls on them, and you should be careful too!
Enough from me, I’m going back to revising a few more contracts. Good luck, and let me know if any of what I’ve written rings true (or not).