HMRC & IR35
IR35 was first introduced by HMRC on 6th April 2000 to combat tax avoidance by Workers supplying their services via a limited company (‘Personal Service Company/PSC’), who, but for the PSC, would be considered an Employee (and pay increased levels of Income Tax and NIC’s as a result).
IR35 is now 20 years old and continues to grow and grow in terms of its notoriety.
Effectively, such Workers were ‘disguised Employees’ and benefited from a net saving in tax of up to 25% when compared to a directly employed individual, including the ability to claim a number of tax-deductible expenses not ordinarily available to an Employee. The engaging organisation also benefits from significant savings as they do not have to pay employer NIC’s, nor do they have to offer any employment rights or benefits.
What factors determine IR35 status?
IR35 is determined by reference to the contract in place and the Working Practices. You cannot avoid IR35. HMRC use a number of factors when deciding if a Contractor falls within IR35, including:
- Control – does the End Client tell you how, when and where your services must be performed?
- Personal service – do you have to personally provide the services or can you send a Substitute in your place?
- Financial Risk – if your work is unsatisfactory, are you obliged to correct it in your own time for no additional reward? Is there an opportunity to make a profit/loss?
- Length of Engagement – Have you worked for the same End Client on a long-term basis? Have you worked for other clients?
What if HMRC decides IR35 applies?
If a Contractor is deemed to be Inside IR35 (and therefore labelled by HMRC as a ‘disguised Employee’), the Contractor will have to pay income tax and NIC’s as if their contracting fee income was employment income and the PSC will face a financial penalty. Therefore, the potential liabilities for a PSC are huge. It is very important that they have a clear understanding of IR35 so as to ensure that they do not fall foul of it. However, this is by no means an easy task given that ever since its introduction, IR35 has been criticised as being highly complex and confusing.
An arrangement is likely to be caught by IR35 if, amongst other things, an individual provides their service to the End Client (or is obliged to do so); those services are provided under arrangements involving a PSC; and the circumstances of the arrangement are such that if they had been made directly between the End Client and the individual, the individual would have been held to be an Employee.
A number of important changes have been outlined in recent budgets, aimed at further removing the advantages of such relationships. In summary, the Government has put in place the following provisions:
From 2016-2017, the £2,000 National Insurance Contribution ‘Employment Allowance’ no longer applied to companies whose sole Employee is also the shareholder/director of the Company.
With effect from April 2016, tax credits on dividends ceased to be paid and dividends were made taxable at the rates of 7.5%, 32.5% and 38.1% for basic rate, higher rate and additional rate taxpayers respectively. The first £5,000 of dividends was made exempt from taxation.
Furthermore, the PSC would be liable to deduct income tax and NICs from travel expenses claimed for travel to and from any assignment where the individual is subject to direction, supervision or control by the Client.
The more recent introduction of the public sector IR35 rules also signalled a new found intent by the Government to close down what they allege to be widespread tax avoidance by those operating PSC’s, rules which, rather predictably, will now be extended to the private sector with effect from 6 April 2020, ensuring that the burden of responsibility for determining IR35 status and the risk of non-compliance moves away from the Contractor/PSC to the End Client.
Please click here to see our Complete Guide to the IR35 Private Client Sector Reforms. This comes into effect on 6th April 2020.
As such, it is more prudent than ever to ensure that any agreements in place contain the requisite precautions to avoid being caught Inside IR35 and incurring hefty interest and fines, in addition to the back payment of tax and NIC. Generally, the agreement between the parties will be the first place HMRC look to establish whether the arrangement leans towards an employment relationship rather than one of self-employment – it is the substance of the contract and the Working Practices which are of importance, not just whether the contract declares the individual to be self-employed.
At Attwells Solicitors, we are able to provide expert advice and documentation to Contractors so as to properly reflect their self-employed status, on a fixed fee basis. We offer real value for money and can review the agreements already in place and provide you with an assessment of such documents, as well as suggestions on any improvements which could be made. We are experienced in drafting new agreements for future use also, ensuring you and your business are protected as best as possible from the hefty financial penalties that can come from IR35 non-compliance.
How can Attwells assist you with your IR35 requirements?
We can offer expert advice and, in particular, offer the following services:
- Consultation meeting and letter of advice– we can meet with you, take your instructions and review your current working conditions and then provide you with a letter of advice setting out what steps to take going forward to best protect your business from IR35.
- Reviewing existing contracts and assessing status – Unlike our competitors, we do not just tell you the result of our review (i.e. whether you are inside/outside IR35), but also give the reasons for this determination, risk areas and what steps can be taken to strengthen (and possibly change) your position.
- Drafting new contracts – We will draft fresh contractors for your PSC, recruitment business or Contractors including all the relevant safeguards needed to protect your business. We will also provide advice around what mechanisms you can put in place, within the current day to day Working Practices, to further reduce the risk of IR35 applying.
How much will it cost?
Attwells Solicitors have particular expertise in relation to IR35 and employment law more generally, we will always offer you a quote based on the work you require. Our hourly rate is £250.00 plus VAT. However, we offer value for money fixed fees for standalone projects, in addition to cost effective retainers where long-term support is needed.
Price: From £400+VAT per month, subject to a minimum 12 month term.
What is included in the price:
- 1-2-1 support from our IR35 legal experts
- Unlimited telephone and email support, including all matters relating to IR35 and strategies on how to mitigate IR35 risks, including those relating to the incoming IR35 private sector reforms
- Bespoke IR35 contracts and documentation including but not limited to consultancy/self employed contracts, supply of workers terms and condition and sub-contractor agreements, in addition to all further employment and HR documentation (e.g. contracts of employment, staff handbooks, self-certification forms, appraisal forms etc.)
- Annual review of contracts and documentation so as to ensure ongoing compliance
- Face to face meetings, as and when required
- Bespoke letters covering SDS decisions and appeals, IR35 disputes and HR matters such as disciplinary/grievance investigations, hearings, appeals, dismissals etc.
- Management and mitigation of legal risks by designing and tailoring company policies and procedures
Price: £100 +VAT extra per month, subject to a minimum 12 month term.
What is included in the price:
All of the above PLUS...
- Attwells' legal fees in defending any Employment Tribunal claims your business may receive
- Full legal representation at an Employment Tribunal
- Representation during ACAS Early Conciliation, helping you to secure a quick, commercial settlement at an early stage and avoiding the need for Employment Tribunal proceedings (where appropriate).