The reforms to off-payroll working (IR35 reforms) introduce new responsibilities and risks to manage throughout the supply chain. Not least of which is the requirement for medium and large end hirers in the private sector to assess the employment status (IR35 status) of engagements with contractors operating through their own personal service companies.
The liability for tax and National Insurance (NI) is only removed from the end hirer once they have assessed the IR35 status of an engagement using ‘reasonable care’ and have issued a Status Determination Statement (SDS) to the contractor and the party with which they hold a contract – the first agency in the supply chain. So, it goes without saying that it is vital that IR35 status is assessed accurately, using reasonable care.
How is IR35 status determined?
The good news is that the employment status tests that underpin the IR35 legislation are not changing, it is only the responsibility for the assessment that is shifting. The IR35 legislation does not itself define what constitutes an employment relationship and so we must look to case law.
The key factors that must be considered are:
- Control – the control exercised by the end hirer should fall short of that found in an employment relationship to maintain an outside IR35 status. Consider who has control over the how, when, where and what.
- Personal Service/Substitution – the unfettered right to send a suitably qualified substitute is a strong indicator of falling outside IR35.
- Mutuality of Obligation – If there is an obligation on the end hirer to continue to offer work and an obligation on the contractor to accept it this would point to an inside IR35 status. In a business-to-business relationship, there should be no such obligations.
In addition to the above, other factors should be considered such as whether the contractor carries financial risk, provides their own equipment or will be ‘part and parcel’ of the organisation. It is important to note that determining the employment status of an assignment is not a tick box exercise and you must consider the contract and working practices holistically to ascertain whether there is a deemed employment relationship.
What tools can help support an accurate decision?
Assessing IR35 status can be complicated and for an end hirer to discharge their responsibilities under the reforms it is essential that this is done using reasonable care. There are a number of ways that you can do this:
Check Employment Status for Tax (CEST) Tool
Check Employment Status for Tax (CEST) is HMRC’s own IR35 testing tool, which was released in 2017 to help public sector bodies assess the contractors they engage. While the government claims that it’s able to accurately determine a contractor’s IR35 status 85% of the time, question marks remain over its reliability. The tool has been criticised by experts for failing to adequately consider Mutuality of Obligations and failing to provide a determination in some cases, providing an ‘unknown’ determination. Whilst HMRC has said they will stand by the decision of the CEST tool, they will only do so if the questions have been completed correctly, a difficult task for those unfamiliar with IR35 and the terminology associated with employment status.
Role-based IR35 assessments
Role-based assessments are where multiple contractors with identical contractual terms and conditions are assessed together. While considered compliant by HMRC, this approach does have its limitations. For example, role-based assessments fail to consider ‘in business’ factors that are unique to each contractor. While role-based assessments can provide an initial indication of IR35 status, an individual IR35 review will offer a more accurate determination and will consider the specific details of an engagement.
IR35 review by a tax expert
Contractors have carried the responsibility for assessing the employment status of their assignments since 2000 and unsurprisingly given the complexity of assessing IR35 status have looked to experts to advise them. A review of the contractual terms and conditions and working practices by an independent tax expert is the best way to ensure IR35 compliance. Engaging an expert also means you will receive advice rather than a simple inside/outside decision. An IR35 specialist, where appropriate, may be able to offer recommendations as to adjustments that can be made to terms and working practices, ensuring the status remains as robust as possible.
Of course, some end hirers are choosing not to engage with PSC contractors at all. Opting instead to bring all of their contractors on to payroll, either through direct or umbrella employment. Whilst the reforms to off-payroll working undoubtedly presents challenges for end hirers it also created opportunities. Those end hirers that opt for fair assessments of IR35 status will attract the best talent, the benefit of which could far outweigh the costs of fair assessment.
The reforms to off-payroll working are manageable and with the right advice, you can still compliantly engage with PSC contractors outside IR35. For engagements that have been assessed as inside IR35 make sure you protect yourselves and your contractors by using an FCSA accredited umbrella company.
This article was written by Joanne Harris, Technical Commercial Manager at Parasol (FCSA Accredited Member firm)
Disclaimer: We have taken care to ensure that all information is provided is accurate and valid at the time of publication. Legal advice should always be sought before implementing any changes to processes and practices.