IR 35 - What Next ?

With April fast approaching contractors who work thorough their own limited companies are facing a real dilemma as to how they will continue to operate once the law changes. Contracts will need to be checked for each project and on renewal and there must be clear evidence to support your status as self-employed. Should HMRC decide that the relationship is indeed one of an employment nature they will seek to recover all income tax and national insurance contributions over the period of the contract affected.

There are three main principles HMRC will use to decide IR35 status

·        Supervision, Direction and Control: What direction of supervision, direction and control does your client have over what, how and when you complete your contract and day to day work ?

·        Substitution: Are you required to carry out the work yourself or can you send someone in your place?

·        Mutuality of Obligation: Is your client obliged to offer you work and are you obliged to accept it?

There are other factors that may help decide if you are inside or outside of IR35

·        How are you paid ?: A contractor will typically be paid on a project by project basis while an employee will be paid at regular intervals.

·        Alternative work: If you are obliged to only have one client at a time you are probably an employee not a contractor

·        Equipment: Unless there is a good reason you should be using all of your own equipment

·        Premises: The contract should specify where the work will be performed

·        Corporate involvement: You could be affected by IR35 if you have any involvement with your companies corporate structure – this could be as simple as having a security pass.

·        Integration into Company Structure: If you start appearing in company organisation charts or have direct reports this will all be evidence your contract falls inside of IR35

Other factors that will go in your favour to demonstrate self employed status are that you have your own office, your own marketing materials, you are VAT registered and have your own accountant.

On a practical note these legislative changes have already had a major effect on the contracting market. Many of the major employers such as Tesco Bank, HSBC, Barclays and Lloyds have said that all contractors working through their own limited companies must go on the payroll from January. Their risk adverse approach can be explained by the fact that in larger businesses the status of workers must be decided by the client and it is their liability if they get it wrong.

Several contractors who have worked through their own limited companies are now facing the reality that for many contracts working as a PAYE employee on a fixed term contract is really the only option. The effect of this on what is a flexible and highly skilled workforce will be interesting to watch. The Inland Revenue are obviously interested in closing a loophole for contractors who are really working as employees and claiming better tax rates but what they are failing to recognise is that many contractors find it hard to stay in work for 12 months of the year and these changes will surely make this career option far less attractive for many.

HMRC has just lost a recent case claiming over ￡200,000 in tax from an IT consultant under IR35 legislation. It fell down on mutuality of obligation although HMRC has stated it will appeal the decision. The fact remains many will not want to risk a large tax bill and may organisations are likely to insist on contractors being ‘on the books’ moving forwards. This is a huge change to the private sector at a time when business is already vulnerable to challenges from Brexit. 

Unsurprisingly the issue has become very political with the upcoming election. With all parties not wanting to loose the support of those likely to be affected all of the major parties have now vowed to review the legislation. However the only party for it actually to feature in their manifesto is the Liberal Democrats and the worry is to whether the review is genuine or simply lip service to win the vote of independent workers. The future then currently remains unclear but from speaking to many who have operated in this space for many years these changes are definitely unwelcome and put yet more pressure on tough market conditions.