We have covered below the most common questions we received in connection with IR35 and the changes coming into play from April 2021 and have provided generic answers that will hopefully assist you when addressing some of your concerns. This is not an alternative to taking bespoke advice that considers the specifics of your circumstances and we would always advise that you take appropriate advice before acting.
IR35 Masterclass – Changes In April 2021, Are You Ready?
IR35 Q&A
Any prospect of further deferral?
Added: 05/02/2020
We just do not know. HMRC are adamant that this is going ahead in April 2021, but clearly the Government could decide to postpone. The problem is that relying on a late postponement will not give you enough time to prepare if this does not materialise and therefore it is prudent to proceed on the basis that this will happen as proposed. Even if there is a postponement, you will be well prepared for when it does happen.
How does this interact with the Construction Industry Scheme (CIS)?
Added: 05/02/2020
If you engage an individual to undertake work in the construction industry, your first tax question should always be – does the relationship look like employment or self-employment. It is only when this answer is self-employment that you should consider whether the services are within the scope of CIS or not. It is the same with IR35 for those using an intermediary. First ask the question of whether IR35 applies and it is only when the answer is “no” that you will consider CIS.
I’d like to understand how accurate the CEST tool is and if we can rely on this or not.
Added: 05/02/2020
The CEST tool weighs answers to questions to try and reach a verdict. It does not consider issues such as mutuality of obligation though and does reach the wrong conclusion in some cases. However, it can be useful because HMRC say they will be bound by the verdict providing the answers used are accurate. You therefore need to be able to defend the answers used. The most dangerous aspect of the tool is in relation to substitution because if you answer the questions to say there is unfettered substitution then you will get the verdict that the regulations do not apply. This is because employment must have personal service. However, where substitution has never been exercised and is never likely to be exercised, HMRC may seek to treat this as a “sham” clause and ignore it. To counteract the risk of your CEST verdict being ignored, I recommend that you undertake a second CEST test deliberately failing the substitution questions so you test the rest of the contract. This will tell you how much risk you carry by relying on the first verdict and hopefully provides a fallback position in the event that HMRC successfully challenge the substitution position.
How does HMRC balance CEST outcomes versus actual inspection results for a PSC? To what extent is the Hirer liable for this if the CEST outcome is factual and outside IR35?
Added: 05/02/2020
HMRC will stick by their tool verdict and if this determines the IR35 applies then you should expect a battle if you choose to ignore this, with the expectation that this could go to a tribunal. You would therefore want a very strong verdict in support of self-employment from applying the guidance from case law before you choose to ignore a CEST tool verdict. This does carry risks though and potentially significant costs if this goes to court. My preference if you are in this “grey” area is therefore to look at the contractual arrangements and see whether these can be strengthened while still leaving these practical and in line with commercial requirements. If the arrangements are structured from the outset to ensure they comfortably satisfy the conditions for self-employment, the CEST tool will conclude that the regulations do not apply and you are much less likely to find yourself in a difficult situation.
Do we need to have a contract in place with intermediary?
Added: 05/02/2020
Absolutely yes you do. I suspect that you cannot name any other contractual arrangements that your business has entered into with other businesses where you do not have contracts setting out what is to be done and the payment due for this. Commercially, you leave yourself very exposed if there is no contract and one of the parties has not delivered what was expected. From a tax perspective, it is very difficult to argue that the individual has undertaken the work without being subjected to supervision, direction or control if there is nothing setting out what they have agreed to do in advance. This is especially so where the individual could be regarded as an “office holder” of the end client. The term office holder is much wider than statutory directors and company secretary and care is therefore required. Since 2013, subject to very limited exceptions, office holders have been automatically caught for PAYE if engaged directly and to IR35 automatically where engaged through an intermediary. Sometimes these individuals have two roles, one of which is an office holder and the other is non-office holder duties. Where there is only one contract covering both roles, or worse still, no contract at all, PAYE or IR35 will apply to all payments automatically without the need to consider anything else. In cases where there are two distinct roles, providing these are under separate distinct written contracts then you may be able to consider them individually. This means you can have a situation where the office holder contract is caught, but the other contract may not be. This is however very high risk and you will want the non-office holder arrangements clearly indicative of self-employment before you consider this because HMRC will look at this really closely in the event of a review.
Is there a length of contract at which this will switch from self-employment to employment?
Added: 05/02/2020
The short answer is no, but I would add that the longer the contract, the higher the degree of mutuality of obligation. However, the bigger problem is often the familiarity that grows the longer the relationship exists, rather than the length of the contract. Where the arrangement is new, the parties will usually ensure that the contractual terms are met to the letter because of the risks that come with not complying with the contract. After time, as trust increases, some of the contractual terms may slip by the wayside and the relationship can morph from two independent businesses to something much closer. Consequently the relationship may become one of “worker” or employee rather than independent business. Care is therefore required to ensure that independent businesses are always treated as independent businesses.
Where freelancers are to work on a specific project for a specific time is the contract services agreement protection against the IR35 rules?
Added: 05/02/2020
No, even short term assignments may be regarded as employment. All assignments therefore need to be considered on their own merits.
Looking to understand where the risk lies if we have contractors from recruitment agents and these contractors then onward work for our clients.
Added: 05/02/2020
It sounds as though you are supplying people to an end client. If not small, the end client will determine the status and tell you. You must pass this on to the next agent in the chain or the liability rests with you. You will also need to be satisfied that those further down the contractual chain are applying the rules correctly or there is risk that the liability comes back to you under the transfer of liability rules. In simple terms, you will not want to do business with any agencies that you are uncertain whether they are applying the rules correctly so due diligence of the supply chain is crucial. You have not said, but if the agencies below you in the supply chain are non-UK (including channel Islands and Isle of Man as well as different countries) the obligation to apply PAYE remains with you as the nearest UK based agent to the personal service company in the supply chain.
What do we need to do if we want to take on a temp contractor via an recruitment agency (short terms)? We would pay the agency and the agency would pay the contractor.
Added: 05/02/2020
Yes, providing the agency is UK based, but you will want to carry out due diligence to ensure they apply the rules correctly. If the agency is offshore then you are also required to operate PAYE on the amount to be paid to the individual.
What would the tax implications be if a contractors agreement is with an entity outside the UK but the company also has an entity within the UK?
Added: 05/02/2020
This will depend on whether the end client has a UK presence. The UK entity may create a presence for the overseas company, but this will depend on the circumstances. If in doubt, it would be prudent to assume that the end client is within scope of the regulations and act accordingly. If the end client definitely does not have a UK presence – the status quo remains with the contractor and their PSC responsible for determining whether IR35 applies and paying the liability if applicable.
We have a self-employed contractor who is a US citizen and lives in the US, but he works remotely on a long term contract for one of our UK clients, who is a large financial institution. We are the intermediary and we only have 10 staff. Is this contractor affected by the new IR35 law?
Added: 05/02/2020
If the contractor is non-UK tax resident and all the duties are performed outside of the UK and UK territorial waters then PAYE would not apply if engaged directly and therefore the IR35 rules do not apply. However, you may need to consider whether any obligations exist in the territory where the individual is working. If the contractor is UK tax resident, or some of the duties are performed in the UK then the large financial institution is responsible for determining whether IR35 applies in respect of the relationship between them and the contractor. If it does then they will tell you to apply PAYE to the payments you make.
Does IR35 apply if I have more than one client, even if 90% of my time is spent just for one client?
Added: 05/02/2020
Yes IR35 could apply so needs to be considered for each contract because having multiple clients does not automatically mean that these would not be two part-time employments if engaged directly. You could find that one contract is with a small end client so you determine the status and apply IR35 yourself to these payments if appropriate whereas the other contract is with a medium sized business and they will determine the status for this contract. You may also find one is caught and the other is not.
How do we do our due-diligence on a company saying they are following the guidelines?
Added: 05/02/2020
You need to satisfy yourself that they are doing everything correctly to protect yourself from risk under the transfer of liability rules. If they are not willing to provide evidence that they are applying PAYE to everything they are paying to the contractor then you will ask yourself why. Ultimately, if you do not trust the agent to apply the rules correctly, you will be unwise using them.
We have self-employed subcontractors & commission only agent – we had a revue by HMRC 5 years ago who deemed that they were genuinely self-employed – do you think that these circumstances will change … or would you be better off considering a “Zero Hours” contract for these individuals …?
Added: 05/02/2020
Evidence of a prior HMRC review is really important and should be retained in case HMRC revisit this later and the new Inspector takes a different view. Providing full information was made available at the time, HMRC should not be able to revisit the historic position prior to that conclusion, even if a later Inspector considers that they got it wrong. The next question is whether the latest status determination rules and case law would change the verdict if looked at again. It is therefore important the you reconsider the position yourself to ensure you are happy that the self-employment status remains valid. The other issue is that if the same people are still working for you on a self-employed basis five years later then are the current arrangements identical to those five years ago. It will not be a surprise to hear they have changed and therefore relying on an out of date review is dangerous. Once reviewed, you may need to strengthen the arrangements, or if more appropriate, switch to an alternative engagement method.
Re Substitution, does it need to be demonstrated on a per person/PSC basis or just by the company engaging the PSC’s?
Added: 05/02/2020
Demonstrated by anyone engaged in similar circumstances not necessarily every contractor. You are demonstrating that this is a genuine right of substitution and not a sham clause. This must be satisfied in genuine circumstances, and not be contrived to give the impression that substitution is genuine.
If PAYE & NIC is deducted from my receipt into my PSC, should I simply credit the receipt to my Current Account and deem the income as employment income on my Tax Return?
Added: 05/02/2020
The contract is with your PSC and the payment should be made to the PSC bank account, not your personal account because you are separate legal entities. For tax purposes the pay and tax will be in the name of the individual and you will have a P60 with pay and tax to go onto the personal tax return. The accounting treatment must be considered for the PSC though because legally this is company income and it must be treated correctly for accounts and VAT purposes, even if the PAYE is applied on the individual as a deemed employee.
We have a long term contract with a client at fixed day rate. Our margin is less than the Employers’ NI. Do the new rules represent a force majeure event that allows us to break the contract?
Added: 05/02/2020
You will need to renegotiate your contracts. Legal advice should be taken if the client or contractor refuse to renegotiate the contracts.
Do the end client obligations apply if the end client is outside the UK? I have a scenario where the end-client is in the EU and is large but the intermediary is UK-based but doesn’t meet the size criteria.
Added: 05/02/2020
If the end client has no UK presence at all then the new regulation do not apply. You therefore remain with the status quo where the responsibility remains with the contractor and their PSC to assess whether they would be regarded as an employee if engaged directly and then to account for the taxes if appropriate.
In practice, are you seeing many large companies refusing to engage contractors and demanding that all workers are paid via PAYE at some point along the supply chain?
Added: 05/02/2020
There is a mixed bag with some very large end clients refusing altogether to engage directly with those using a PSC. Some are insisting on umbrella companies instead. I agree that this moves the payroll processing responsibility away from the end client, but the end client still has the responsibility for determining whether the regulations apply, dealing with appeals and they need to undertake due diligence to ensure that the umbrella company deals with this correctly. There will also be charges by the umbrella company so this is not going to reduce the costs overall in the supply chain so there will ultimately be a higher cost to the end client or lower pay to the contractor , or both.
Can you clarify who is responsible for checking IR35 status if the end client is outside UK?
Added: 05/02/2020
If the end client has no presence at all in the UK, then the responsibility remains with the contractor and their PSC.
You mentioned end clients will now consider contracting directly with PSC. Agents may still be involved finding the contractor. Are you seeing PSC contractors charging the end client more on the basis the PSC is left to deal with the agency charges (basically the PSC is paying directly for the introduction)?
Added: 05/02/2020
This is dependent on market forces with supply and demand determining where the additional costs fall. There are two sides to this though. Firstly there may be a ceiling value for the project which is either the value to the end client of the project, or the amount they are able to pass on to their customer, depending on the nature of the project. Clearly they cannot exceed this or the project is commercially unjustifiable. Secondly you move on to the supply and demand pressures that will set the market rate. In some cases, the additional costs land with the end client, either directly or indirectly. In others, the end client is refusing to pay more and the costs are falling on the intermediaries in the form of smaller margins, or on the contractor as reduced income.
When determining the size of the entity, do they look just at the company or the group? i.e. Parent co is large, subsidiary with the contract with PCP is small.
Added: 05/02/2020
It is the combined size of the organisation inclusive of overseas associated or connected companies that determines the size, not just the size of the engaging company. In some cases, pretty small organisations are still caught because they are not classed as small by the Companies Act.
If limited co contractors wish to move to an umbrella company how does that fit in and do they fall outside of IR35
Added: 05/02/2020
The addition of an umbrella does not reduce the chances of IR35 applying and could actually increase the chances. To clarify, the end client (if not small) will determine the status and an umbrella company in the supply chain does not affect this. However, if the end client determines that IR35 does not apply then the umbrella company may need to apply the managed service company (MSC) rules instead which more or less gives the same outcome. The MSC rules are wider reaching than the IR35, rules, hence you can have the situation where an end client correctly determines that IR35 does not apply, but this is caught by the MSC rules and PAYE applies.
If we determine a contractor is within IR35, who is responsible for any tax not paid in the past? Is that the contractor?
Added: 05/02/2020
Usually the historic underpayment of tax will remain with the PSC and the contractor, but in some circumstances this can fall on the end client. For example, if the contractor is an office holder of the end client, or the end client was instrumental in the arrangement to operate in this way. The end client will also need to be wary of their obligations under the Criminal finances Act and the risk of facilitating tax avoidance which comes with severe consequences.
So, if you’re are a large end customer and you are about to have a major building project conducted, you have to review the contractual status of all personnel who are to be treated by the main contractor as independent contractors?
Added: 05/02/2020
Try not to get to tied up on terminology because under the CIS rules this is your project and you are the main contractor regardless of whether you have outsourced this entirely to what you are calling the “main contractor” You first need to consider what you have been supplied with. If you have outsourced the project to a “main contractor” who will deliver the completed project, then you have not been supplied with labour and you are not the “end client” Consequently, you will apply CIS to the payments you make to the “main contractor”. The main contractor is almost certainly being supplied with labour and if the “main contractor” is not small, they will need be “end client” and will need to consider the status of the workers supplied to them.
If the work being carried out is digital (online) by individuals based in the Ukraine but the PSC is UK based, is there risk there – should we be assessing them for IR35?
Added: 05/02/2020
The first point to be considered is whether the contractors are within scope of UK PAYE. If they are non-UK tax resident and the work is being performed wholly outside of the UK then UK PAYE should not apply and therefore IR35 cannot apply. However, I would question why there is a UK PSC in place here. It seems hard to see how this company is being centrally managed and controlled in the UK, if the directors are never in the UK. If it satisfies the tests for being controlled and managed in the UK, it casts doubt on the inference that all the work is being performed in Ukraine so I would be nervous. It therefore seems more likely that this company is tax resident in the Ukraine and should be following Ukraine rules and paying Ukrainian taxes. For you as “end client” you may have responsibilities in the Ukraine with this arrangement and local advice should be obtained in case the Ukrainian rules say you need to look through intermediaries and you are ultimately treated as the employer with responsibility for Ukrainian payroll and Ukrainian social security contributions. The HLB International network has a Ukrainian member that I can link you up with if you require local advice.
Is a business the end client if they provide full service to another business?
Added: 05/02/2020
Potentially yes, if they are provide a fully outsourced service to their client then they should consider whether labour has been supplied to them. If it has, they are end client and should consider the IR35 position if they are not “small”.
If there is no individual named in the contract, and we do not have knowledge of who is actually doing the work (UK based), do we still need to assess for IR35?
Added: 05/02/2020
If you do not know who is doing the work, it seems unlikely that you have been supplied with labour and even less likely that personal service is present, but I would need more information to be able to provide a categoric answer.
Is it possible for hybrids to exist? where sometimes the worker is an employee, sometimes a self-employed person?
Added: 05/02/2020
In theory yes, but you would need these to be supplied under separate contracts or you need to look at this as a composite supply and where you have some parts of the work caught and others that would not be (if looked at in isolation), the concern is that everything is caught with a composite supply.
Also-how far back does the potential for HMRC to claw back?
Added: 05/02/2020
This will depend on how the non-compliance is classed. Careless is 4 years, negligent is 6 years and fraudulent is 20 years.
How does a client avoid liability? Checking PAYE being operated?
Added: 05/02/2020
Yes, you need to be satisfied that all parties in the supply chain are doing what they should be. Evidence that PAYE is being operated on the full amount paid to the PSC is perfect.
So if a small business engages a contractor and they are the end user e.g. engaging a bookkeeper, are they exempt from IR35?
Added: 05/02/2020
The small end client is not within scope of the new regulations and therefore the responsibility for assessing whether IR35 applies and paying the tax if due falls on the contractor and their PSC (unless the “small” end client is instrumental in the arrangement for the contractor to operate through a PSC – which can make the small end client liable).
A PSC is engaged by an overseas company but the contractor owning the PSC describes himself as International Director of the overseas client. Overseas client is wholly outside UK. Is PSC responsible to determining IR35 status?
Added: 05/02/2020
Providing the overseas company has no UK presence then it is outside of the scope of the new regulations so the responsibility lies with the contractor. However, If the contractor has the role of “International Director” for the client company, there may be risk that they personally create a presence in the UK for their client, but this will depend on the circumstances. Either way, the title of “International Director” is indicative of an office holder and office holders are caught automatically for IR35 if engaged via an intermediary such as a PSC, or are automatically caught for PAYE if engaged directly. This has been the case for tax purposes since 2013 and was already the case for National Insurance purposes before 2013. I would also suggest that consideration is given to the rules in the country where the end client is situated. The reason for this is that while IR35 is purely a UK issue, some other countries do not need IR35 because they already simply look through the intermediary and apply tax and social security as if they are an employee.