IR35: What contractors need to know

Contrary to what the internet would have you think, the world of contracting is not dead. However, there are definitely things you need to be cautious of as a contractor in a post IR35 world. We’re breaking down some important things you may have missed about the change to off-payroll working rules.

What is the IR35 reform?

Essentially, if you’re a contractor for a medium or large private sector organisation, the way you pay tax is changing. From April 6th, your client, or the agency that pays you will be responsible for determining your IR35 status. If you are judged as inside IR35, they will deduct Income tax and National Insurance from your fee.

What is inside and outside IR35?

The main change coming in the reform is that your contracted role must now be proved to be distinguishable from a salaried employee. If it isn’t, your role will be considered ‘inside IR35’ and you’ll be taxed as an employee of the company.

Many contractors set up a Personal Service Company (PSC) to provide their services to clients, but unfortunately this alone isn’t enough to prove your status. The ball is in your court to show that your duties are distinct from an employee’s and ‘outside IR35’.

How do I know my status?

You can use HMRC’s Check Employment Status for Tax (CEST) tool, but numerous industry bodies warn against this. If you can, don’t solely rely on CEST for determining your IR35 status. As this is intended to be a quick and easy tool, it’s been known to ignore context, making assumptions about your situation that may be false.

The main problem is that CEST presumes that Mutuality of Obligation (MOO) is in place for all contracts. MOO is integral to traditional employment, stating that the employer and employee have obligations to each other. For example, the employer must offer work to the employee which must typically be accepted. Contractors, however, don’t usually have expectations of future work and are often engaged to complete a single project.

Other factors to bear in mind that distinguish you from an employee are Substitution and Control. If your client wants no one else but you to complete the work, you will be deemed an employee. You must be able to show that your work could be substituted by another person in your absence. Equally, HMRC measures the level of control the client has over you, including how and where you perform your work. Contractors usually have more autonomy than an employee, but it’s important that you can show it.

How can I prove my status?

There are ways to strengthen your case that you are outside IR35 but ensure that you and your client agree. Keep all correspondence that shows that there is no MOO, and that the client doesn’t have control over you. Confirm that the client cannot reject a substitute for your work as this greatly impacts the decision of CEST.

If you have a PSC, don’t name it after yourself. This implies that you alone are the provider of the work and you could not be substituted. Hopefully, you can also demonstrate that you are marketing your services and are not solely contracting for one client. The way you behave and communicate can also be used to display that you are external to the business. Remember that you are only supporting the organisation, not making business decisions – you are offering your “professional opinion.”

Find out more about how to prove your status in our Contractor’s IR35 Guide here.

What can I do if I disagree with the outcome?

Fortunately, you can appeal your status if you disagree with the verdict. You will have to go through your client’s status disagreement process and then complete a Self Assessment if you believe you have overpaid tax. At this point, HMRC will ask for any supporting documents such as a Status Determination Statement. This is where your diligent record-keeping will pay off and could get your client’s IR35 decision reversed.

As long as you follow the rules and engage in clear communication with your clients, you should be able to avoid the pitfalls that have got people so worried about the IR35 reform.

If you’d like more information on what to look out for as a contractor where IR35 is concerned, you can access our comprehensive Contractor’s Guide to IR35 here.

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Tilden Lamb

25th March

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