Your IR35 questions, answered.
What technology contractors and organisations need to know about IR35.
With barely a month to go until the start of the IR35 reforms, we’re getting a lot of questions from both technology professionals and hiring organisations, about what this means for them.
I asked Tax Expert, ex HMRC inspector and Head of Tax at Kingsbridge, Andy Vessy, his advice on the top 5 most asked questions we’re getting and here’s what he had to say.
Top 5 most asked IR35 questions
1. Is there any likelihood of a last-minute delay to the IR35 reform like last year?
Whilst one can never say never, at this moment in time it seems most likely that the reforms will happen on 6 April. Over the last few weeks, I have posed the question to HMRC a number of times & have been met with the same response, i.e. that the department fully expect the OPR to take effect in a few months’ time.
This week, I also received an e-mail from HMRC confirming the work that the department is undertaking to help businesses prepare for the changes before implementation on 6 April.
They go on to say that they are also considering the education & support that may be required from April as the reforms bed in. Since the turn of the new year, HMRC has ramped up its education drive, further signalling their firm belief that the OPR for the private sector will commence from 6 April 2021.
2. Is CEST a reliable tool to use to make Status Determination Status’s (SDS’s)? If not, why?
CEST has its usefulness in as much as carrying out a litmus test on a contractor’s status but it does not address one of the most fundamental tests of employment status, ie MOO. This is because HMRC have a very simplistic & narrow interpretation of MOO that contradicts the courts’ view. MOO, along with personal service & a right of control are the three major status tests, so by ignoring one of these tests flaws the tool.
Businesses will naturally be tempted to use the tool to make their determinations because HMRC give an assurance that they will stand by its results provided the answers given to the questions are truthful & accurate. NHS Digital discovered that HMRC’s promises can be quite shallow, when they were faced with a £4.3M tax bill back in 2019, after HMRC challenged a significant number of status determinations thrown up by CEST! HMRC say that the tool arrives at a conclusion in 85% of cases, with 15% of cases requiring further review because they are inconclusive. In these 15% of cases, businesses will then have to reach a decision for themselves either inhouse, external advice or referring to HMRC.
I am confident that HMRC will arrive at an ‘inside’ IR35 opinion in indeterminate cases that are referred to them, given their behaviour in recent years when conducting IR35 enquiries. Using a more robust status tool, such as the Kingsbridge model, then in situations where an outright determination cannot be made, you have access to IR35 experts who can make an impartial & informed judgment call that can be relied upon.
3. Lots of contractors are being asked to work inside IR35 post April 2021 as an extension of their assignment where they have previously sat outside IR35. An obvious concern being raised is will HMRC view this negatively and consider retrospective tax for these contractors?
HMRC have, for some time now, repeatedly stated that they will not use information acquired as a result of the changes to the off-payroll working rules to open new enquiries into years prior to 2021/22 unless the department has reason to suspect fraud or other criminal behaviour (this would be very extreme behaviour). The department has even committed to this pledge in their guidance ESM10036.
Furthermore, once we have seen off the worst of this pandemic, I doubt that HMRC will have sufficient resources to carry out many immediate IR35 enquiries anyhow as they will be spending a fair amount of time carrying out compliance checks into CJRS claims that they believe have been overstated or fraudulently claimed.
4. Can you clarify the rules including around small business exemption as understand the changes to the legislation don’t apply to all companies?
The OPR only apply to medium or large-sized corporate entities (this includes LLP’s, overseas companies & unregistered companies), not small companies for the time being. A company will medium-large-sized if it meets two of the following criteria for two consecutive financial years:
turnover of more than £10.2M
total gross balance sheet assets of more than £5.1M
average of more than 50 employees
Similarly, a company will cease to be medium or large if it no longer meets at least two of the criteria for two consecutive financial years.
When considering the qualifying criteria, a corporate entity must look at the financial year for which the period for filing its accounts & reports ended before the beginning of the tax year concerned to determine whether the tests are met. For example, a company with a y/e of 31.03.20 with have a filing date ending on 31.12.20. This period ends prior to 06.04.21 so the y/e 31.03.20 will be included in considerations regarding size.
Where a company is part of a group, then that group’s size is determined by the size of its parent company.
Non-corporate entities classed as ‘other undertakings’, such as partnerships, are subject to a simpler test. They will be medium or large-sized if their turnover is more than £10.2M for the last financial year ending at least 9 months prior to the beginning of the tax year.
5. How frequently should companies be reviewing the Status Determination of their contractor workforce in the future? (extension etc)
It is only necessary to revisit a workers’ SDS where there are material changes to their T’s & C’s and/or working practices. For example, where a contract extension withdrew a right of substitution, then the end client would need reconsider the status under the new terms & issue a new SDS, if necessary.