Frequently asked IR35 questions answered

Contractor accountancy, Integro Accounting, shares its views on IR35 in this jargon-free breakdown, in which it explains what IR35 is, discusses IR35 reform and much more. 

What is IR35?

IR35 is a piece of tax legislation that was introduced in 2000 with the aim of stopping ‘disguised employment,’ which is when a limited company contractor whose engagement reflects employment pays themselves more tax-efficiently through their own company, also known as a personal service company (PSC). The Government’s argument was that if a contract reflects employment, the individual should be taxed as an employee and must pay full NI and tax on their income.

What does the IR35 off-payroll roll out to the private sector mean for contractors?

Quite simply, HMRC has decided that instead of the contractor determining their own IR35 status, the end-client will do this, with the fee-payer picking up the IR35 liability. Reform will apply to medium and large private sector companies, with contractors engaged by small companies able to continue setting their own status. 

A similar version of these rules has existed in the public sector since 2017, but applies to all public sector bodies. 

Who’s affected by the IR35 private sector legislation change?

Personal Service Company (PSC) and limited company contractors. People classed as self-employed, sole traders and umbrella companies will not be affected by IR35 changes. 

What’s a ‘blanket’ decision?

A blanket decision is when the end-client decides all contracts automatically fall inside or outside of IR35 regardless. An end-client may decide on this decision purely out of fear, lack of understanding or because they do not have the resources to conduct accurate IR35 status reviews when engaging contractors. 

However, HMRC has stated blanket IR35 assessments are not compliant. The end-client will also be required to provide a ‘Status Determination Statement’ (SDC) which details the reason the IR35 decision has been made – this is a bid from HMRC to increase transparency, aid accuracy and stamp out blanketing.

Can contractors challenge IR35 decisions? 

Absolutely. If you feel the end-client has ‘blanket’ assessed you and is incorrect in their decision, you have every right to appeal. Contractors can challenge the result through the ‘Client-Led Disagreement Process.’ 

In the view of IR35 experts, all contracts should be reviewed on an individual basis and based solely on the clauses and working practices. 

What’s considered in an IR35 decision?

When assessing IR35 status, the party responsible for determining if a contract sits inside or outside the legislation should consider the following:

• Substitution

Can you as a limited company contractor decide who carries out the assignment? Typically, you should be able to send a substitute with equal skill sets to complete the project for your contract to belong outside IR35.

• Mutuality of Obligation (MoO)

Is the client always required to offer you assignments? If there are periods within the contract where you are not required to work, there should be no obligation for the client to provide you with work and therefore pay for your services. Generally, MoO shouldn’t exist in an outside IR35 contract. 

• Control

Are you under direct supervision from the end-client or not? An outside IR35 contractor is a service provider, not a direct employee and should therefore not directly be managed by the client. 

There are plenty of other factors to consider, but what matters most is that for the contract to fall outside IR35 it must reflect a business to business engagement. 

It’s also important that your contract aligns closely with your working practices. 

What are ‘working practices’? 

HMRC can always challenge a contractor and their working practices. Although the clauses in a contract help define your IR35 status, your working practices must also reflect this. They should work in parallel to show how you compliantly operate outside IR35. 

Should contractors get an IR35 contract review? 

Yes. Although ultimately IR35 status will be determined by the end-client from next April (unless you work with a ‘small’ company) a contract will be HMRC’s first starting point for enquires. In having your contract reviewed from an IR35 perspective – even though you might not be responsible for setting your status – you will be in a strong position to challenge your client’s decision, should you not agree with it.

Should contractors take out IR35 insurance? 

Up until April 2020 in the private sector, all IR35 insurance will cover you, as the IR35 decision-maker on your contract. From this point, the insurance will be void and the fee-payer will need to have separate insurance should HMRC ever question their decision. 

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