As you may have heard in the last week, IR35 reform is to be implemented (subject to a final consultation) into most of the private sector from April 2020. The responsibility for determining IR35 status will move from the PSC to the end client. There will also be an exemption for businesses that meet the small company definition.
Much has been written about this reform already of course, some of it forecasting doom and gloom for contractors in the UK. We at NASA however don’t see it this way.
The reason for this is simple. Over the last 15 years HMRC have brought many cases to the tax tribunals where they felt IR35 had not been applied correctly. HMRC were unsuccessful in the vast majority of these cases, indeed they still continue to be (last weeks Kickabout case is a prime example). The legal precedent created here for IR35 is clear - in most cases a contractor’s role is not ‘inside IR35’.
This precedent is extremely important in relation to the IR35 reform. It has shown that it is very difficult to build an employment relationship between an end client and a PSC contractor so that they would fall inside IR35. It is only where that bond of employment is created that IR35 taxes would become the liability of the fee payer (post reform).
Therefore, in most cases where the end client does not want an employment relationship, and nor does the contractor, then this will fall outside IR35.
Determining IR35 The end client will need to take reasonable care in determining IR35 and document the reasons down the supply chain, including to the fee payer and contractor.
As mentioned above, legal precedent indicates some key areas are:
A strong IR35 contract between agency & PSC which include common self-employed indicators; risk for defective works, insurance, favourable mutuality etc
Crucially, neither party’s intention to have an employment relationship must be included in the contract/schedule
Of course, the working practices (actual or expected) need to support this contract position so that the end client & contractor ensure that they don’t undermine the contractual terms by inadvertently creating an employment relationship. Some characteristics that may result in this could be:
Providing training & development for a PSC contractor
Including the contractor in employee HR processes
Integrating the contractor into the employee workforce (employee councils etc)
Where the intention and working practices tie up, the role can be advertised and performed outside IR35.
The end client documented process can be passed down the supply chain as required to support the IR35 position.
Understanding IR35 in the Private Sector NASA have helped over 6,000 contractors with IR35 Appraisals and are a leading expert on IR35. We have also had significant experience of helping our agency clients through the Public Sector IR35 reform in 2017.
Over the coming weeks we will be releasing guidance on IR35 reform into the private sector, exploring the cases behind the legal precedent and what the IR35 determinants will therefore be to help end clients prepare and implement a solid process, ultimately to ensure contractors who are outside IR35 can stay that way. We also have a team of consultants highly trained in IR35 who are to help with any questions you may, be they from end clients or contractors. Please contact us on firstname.lastname@example.org.