If you’re a contractor in the UK market operating via your own Limited Company you may have experienced the following IR35-induced emotions in recent months - Disbelief; Horror; Frustration; Fleeting hope; Confusion; An awful sense of foreboding - and I’m pretty sure that although all of these may still apply, confusion is by far the most pervasive and persistent feeling of them all.
We, at Aquent, are not financial advisors. But, in preparation for the changes to come, we have spent some time dissecting the legislation, talking with trade bodies, attending professional seminars and attempting to wade through the IR35 swamp. And whilst, HMRC may tweak their guidance ahead of the April 6th go-live date, we wanted to bust some myths, clear up some confusion and dispel those misconceptions based on what we know, as of right now.
Throughout, we’ll be using some jargon that I think it’s best to outline here first:
- Personal Service Company (PSC) - For the readers of this blog, this means the worker’s Limited Company
- Off-payroll - In these cases, IR35 is applicable and the worker is being paid through their PSC, meaning deductions are being made at source
- Inside - IR35 is applicable
- Outside - IR35 is not applicable
- CEST - HMRC’s online tax status checking tool
What is IR35?
IR35 is tax legislation and broadly speaking means that when working through an intermediary (a PSC / Limited Company), if the nature of your work has elements that suggest or demonstrate employment, tax and NIC (National Insurance Contributions) should be paid.
IR35 is not new - the legislation itself has been around since the late 1990s and was predominantly a result of the tax freedom companies had available with dividends. What is new, is WHO is responsible for making sure the correct tax is paid. Rather than being the worker, it is the fee payer (recruitment agency or client).
What do the changes in IR35 legislation mean for freelancers, like me, operating via their own PSCs?
The changes to the legislation from April 6th 2020 will shift the responsibility for determining the tax status from the PSC to the end client and the financial liability will sit with the fee payer (usually the recruiter).
For the worker, this means you will no longer be in charge of determining your tax status under IR35. It also means that each engagement you undertake via your PSC will be evaluated by the client and a status determination made as to whether it is inside or outside of the legislation. If it is outside, you will receive your gross pay to your PSC as normal. If, however, it is inside, your gross pay will be subject to tax and NIC deductions at source, thus reducing the pay you receive.
It is important to note at this point, that if an assignment is inside IR35, you should already be paying tax and NIC deductions yourself. It is only the responsibility of enforcing this, which is changing.
Do I need to understand the legislation?
Loosely, yes. Like we said before, this isn’t new. This should already be familiar to you and your PSC. These are your tax affairs and therefore understanding the key points should be in your interest. Financial advisors, accountants and tax advisors should be able to discuss the finer details with you - how your tax return is filed if you are working inside and outside the legislation throughout the tax year; what your self employed benefits look like (offsetting expenses, dividends etc).
Are there any exceptions?
Yes. Where the private sector client is considered “small”, the worker / PSC contractor will remain responsible for deciding whether IR35 applies. A recruitment company should inform you if the client is a small entity, however there is no statutory obligation to do so. Therefore, you must make enquiries when discussing the assignment details, as you will have the responsibility and liability to apply the off-payroll working rules when the client is a “small” company. Please note that the small company exemption applies to the end client, not the fee payer or PSC.
A company is categorised small based on turnover and no. of employees. You can find out more information here.
What makes a role inside IR35?
If there are aspects of your current role that could be considered characteristic of full time employment, then you might be inside IR35. Examples might be - use of client hardware and software, client specified work hours, client specified work location, lack of the right to substitute and so on. The list is exhaustive. The key thing to consider here is - although you might operate as a ‘contractor’, if HMRC were to review your engagement with the client, could they be forgiven for thinking that many aspects of your role would be indicative of full time employment? Another way to think about this is - if HMRC removed the intermediary (your Limited Company) would your engagement essentially be deemed ‘employment’ with the end client? In all honesty, it’s probably ‘yes’ for many.
How will I know if a role is inside or outside of the legislation?
The client will need to make this determination based on the specifics of the role before Aquent can start sourcing for workers. This means when one of our Agents approaches you they should already have a determination to share with you. It is then your decision as to whether you take that role or pass on the opportunity.
Similarly, any freelance bookings that Aquent advertises will clearly display whether they are inside or outside of the legislation, allowing you to apply or not, as you see fit.
Will I still be able to work through my PSC with Aquent after April 6th?
Yes, Aquent has the ability to process off-payroll payments and pay over your tax and NICs to HMRC. This means you can continue to utilise your Limited Company and remain with Aquent.
It is important, however, to note that some clients, in response to the changes in legislation, may no longer wish to engage with PSCs. This is the client’s right and subsequently, should an Agent reach out to you about a role, you may be told that you cannot operate via your PSC for that engagement. Again, whether you pursue the opportunity in light of that information, or not, is up to you. And, our job advertisements will make it clear under which payroll options you can engage with the end client through Aquent.
I am a true freelancer and work on multiple bookings, hopping from one client to the next - will I fall inside the legislation?
It’s a very common misconception that simply having lots of different clients and freelance bookings will prove to HMRC that you are a career contractor and therefore shouldn’t be paying tax at source. However, IR35 legislation is not about you as a whole, instead it looks at each individual engagement and assesses whether they fall inside or outside. Subsequently, even a one day booking with a client could fall inside the legislation if the client deems so.
How are client determinations made?
HMRC has released several iterations of CEST - its online employment status checking tool. This asks a number of questions, poses some scenarios and then, based on the input, spits out a tax determination. Most clients, it is thought, will use the CEST tool as their first port of call for a status determination. Many, however, may also pay for similar, more granular tools that are on the market and provided by Umbrella’s and insurers. These can often act as a backup when a determination cannot be made or simply to reconfirm HMRCs determination. The CEST tool (and any others) must be used with reasonable care - if the information put in is not accurate the decision that is returned also won’t be and HMRC will not stand by a result from their own tool if the decision is based on untruths.
Can I work on multiple assignments and be inside and outside at the same time?
Yes - this is 100% possible. Again, the determination is reliant on the role you are undertaking, so there is the potential for you to work one assignment as inside the legislation and another as outside.
Will my contract say that I am inside or outside?
Yes. Our assignment schedule has a section that clearly denotes whether your assignment has been deemed inside or outside.
What if I don’t agree with the Status Determination given by the client?
The client says the role is inside -
You can dispute this determination if you believe that you can prove it is outside. Agencies and clients will have a mechanism for disputes. This challenge should be made where you believe the reality of your working situation has not been accurately reflected during the decision making process and should not necessarily be a knee jerk reaction to what you see as an unfavourable decision. Upon disputing, the client has 45 days to re-evaluate their decision in light of any additional information. During that time, the original determination stands. If a client agrees with your dispute and changes their mind, happy days! If not, you must be paid as off-payroll, surrendering tax and NICs at source. A thought - how many clients are likely to change their status determination without compelling supporting evidence if the financial liability can travel back up the chain to them? I’d wager, not many.
The client says the role is outside -
It’s unlikely that you as the worker would want to challenge this determination! But, in situations where you are an incumbent worker, the agency you operate via may want to. Afterall, the agency or recruiter is the fee payer and therefore carries the liability for any tax or NICs not paid. If a client determines that your role is outside of the legislation and the agency disagrees, the agency may decide they don’t want to take the risk and walk away from the client completely.
If I am paying my tax and NICs at source am I entitled to PAYE benefits?
No. The changes to IR35 are a mechanism for the correct tax and NICs to be paid to the revenue, it doesn’t change your employment status. You will still be self employed and therefore not entitled to holiday, pension or any other statutory pay.
What if I am working for a client in another country - does IR35 still apply?
Yes. The legislation is about where the work is carried out, not where the end client sits. Therefore even if the end client is offshore, they will still need to use reasonable care to make a status determination about the role so that it can be advertised accordingly.
Will I be investigated by HMRC if my current role is deemed inside the legislation and wasn’t previously declared that way?
Contractor non-compliance with existing IR35 legislation is on a large scale. HMRC are reportedly making changes to increase future tax revenue and realise the financial benefits of the tax legislation, rather than penalise retrospectively. Reform in the public sector saw a good bump in tax revenue and this reform in the private sector is expected to reward similarly. There has been much talk that HMRC does not have the manpower to investigate every contractor that suddenly falls inside legislation. Additionally, HMRC has indicated that they won’t use a new determination to realise tax revenue historically, though in years to come they may change their mind. How HMRC will proceed in reality is yet to be seen.
How will IR35 impact the freelance market?
Rates - Many clients are not offering increases in pay rates or bill rates to offset National Insurance Contributions (NICs) meaning workers will directly be burdening the cost. Whilst this is perhaps more applicable to an incumbent workforce who are having to change the way they engage with the client or work as off-payroll part way through an assignment, it could also impact future hires and their rates. There is little sympathy being shown on the part of big business and, ultimately, their budgets are the dictators. Will the high pay rates of the PSC contractor workforce slowly become a thing of the past?
Timelines - Time to hire may be impacted, especially in the early stages of reform. Many recruitment agencies and managed service providers are having to overhaul their procedures with clients to ensure compliance with IR35 and subsequently, it’s likely there will be bumps in the road and ultimately, delays in getting contractors into roles. Equally, the right to dispute the client's decision may also result in hold-ups. Clients are required to provide a status determination statement when releasing a role. If this takes time to produce or there is uncertainty, roles could take longer to be advertised, sourced and filled, impacting end clients.
Industry - The past year has seen a gradual shift from PSC contractors to PAYE. We can only presume that as HMRC has reduced the benefits available to limited company contractors, IR35 reform in the private sector has come to the fore and end clients have chosen to reduce risk the PSC option has become less widely utilised. Currently Aquent’s working PAYE candidate base is greater than that of its PSC contractor base for the first time in years. IR35 reform could encourage this shift further.
If you would like to read more about Aquent and IR35, you can check out our other blog piece: How IR35 will affect employers and workers.