Since its introduction in April 2000, IR35 (also known as off-payroll legislation) has been one of the most uncertain pieces of legislation in the UK.
However, whatever your opinion on IR35, one thing is for sure.
If you are a business owner, an intermediary, or a contractor, you must have a good understanding of this piece of legislation.
If not, you might have the Taxman knocking on your door.
With that in mind, here are 5 things you probably didn’t know about IR35 – that you probably should!
What is IR35?
Before we begin, we’ll give you a quick reminder of what IR35 is and what rules are changing.
The rules seek to deem a business as an employee in disguise and make sure that workers pay broadly the same tax and National Insurance contributions as employees.
However, from 6 April 2021, the way the rules are applied will change.
All public sector authorities and medium and large-sized private sector hirers will be responsible for deciding if the rules apply to the contractors they engage. Contractors can no longer self-certify themselves to be businesses.
5 Things You Should Know
We will now explore the 5 things you should probably know about off-payroll working.
1) HMRC Loses IR35 Court Cases
HMRC is not the authority on off-payroll working. It is simply an interested party with its interests being in collecting tax. The right authority on IR35 is the legislation – that is much more nuanced than HMRC will openly acknowledge.
The adjudicators on off-payroll working are the Tribunals. HMRC’s view on IR35 has been held as incorrect in 50%+ cases that make it to the Tribunals. It would be foolhardy to focus on satisfying the HMRC whether you are inside or outside. Your real audience is the eventual court.
HMRC have only won 15 of the 35 (43% win rate) IR35 court decisions (since 2000). Meanwhile, contractors have won 18 (51% win rate).
In fact, in the last 19 case decisions (since 2010) HMRC have only fully won 5 cases out of 19 (26% win rate). This is against the backdrop of HMRC claiming that there is widespread non-compliance with the rules.
IR35 is a highly complex piece of legislation that is not just rooted in what HMRC say it is. It is a grey area and is open for businesses to influence the outcomes of IR35 through their actions.
2) Justifying An Outside-IR35 Decision Isn’t Difficult
HMRC’s guidance portrays that it is very difficult to justify an outside decision. However, this is far from the case.
There are 2 key defences that can be utilised to remain outside of IR35:
1) Statement of Work (SoW) based defence – a SoW contract is a document used to deliver a project. If contractors are part of a SoW, the “scope of services” guides their work. Thus, this arrangement falls on the right side of IR35.
2) Substitution based defence – As a contractor you are providing a service, thus you should be substitutable. This means that if you are unable to fulfil your work requirements for any reason, you should be able to provide another contractor in your place. For this to be valid the client must agree to this, and sign a contract to diminish the right to vet the contractor.
All IR35 questionnaires in the market, including the CEST tool, that indicate the impact of contractual clauses and working practices on the IR35 status – are not onerous in terms of the requirements to be found outside IR35.
Complying with off-payroll working in principle requires complying with the law – and not with what HMRC says is the law.
3) Substitution Is The Strongest Defence
Substitution is regarded as a silver bullet to IR35 as questions around substitution in the CEST tool have a very high impact on the eventual assessment.
If you respond “no” when asked “do you have the right to reject a substitute?” it considerably increases the likelihood that your contractor will be deemed outside of IR35.
If a SoW based defence is adopted it will have some impact. However, a substitution-based defence holds considerably more weighting than a SoW based defence.
Including the right of substitution in a contract will keep your contractor on the right side of IR35. All you have to do is prove that your contractor could substitute, or that they would.
Emphasis should be placed on substitution, but it’s unwise to rely on one line of defence alone in forming an IR35 strategy.
4) Insurance Policies Are Not Expensive
If being found outside is close to impossible as HMRC would like you to believe, you would think that insuring for this impossibility would cost a fortune. However, insurance policies are often seen as expensive but this is just not the case here.
An affordable insurance product on the market we would recommend is the Kingsbridge IR35 Protect product. This product protects hirers, contractors and others in the supply chain if they are caught by HMRC for the IR35 liability.
IR35 Protect (Essential) is only £149.50 per contractor and covers £100,000 of cover for Taxes, interest and penalties from HMRC. This product covers whoever HMRC deem liable in an investigation – offering peace of mind throughout the supply chain.
Bundled together with a substitution and/or SoW based defence, insurance policies will help create a formidable (and also affordable) defence. Exactly what we want!
5) It’s Not Okay To Rule People Inside IR35 To Be Safe
The upcoming regulatory changes have led to some private sector clients, including a lot of the big banks (HSBC, Lloyd’s TSB *cough *cough), ruling people inside IR35 ‘to be safe’. However, blanket assessments are non-compliant.
Legislation requires ‘reasonable care’ from the hirer in assessing someone, otherwise the penalty risk doesn’t go away. Moreover, aggrieved contractors with time on their hand could choose to bring a claim in tort against the hirer for negligence.
Furthermore, the best contractors will always have a choice of outside-IR35 clients to work with. The pool of available candidates for inside positions will always be smaller. Ruling people inside IR35 will therefore inhibit an organisations ability to attract the best talent.
In our blog – How to Transition your Organisation to an Inside IR35 Workforce – we explore how you can safely move to a stricter regime where a large proportion of workers are deemed inside IR35.
Being diligent about individual assessments services the dual benefit of (a) meeting the reasonable care requirement of the legislation and (b) creating the possibility of attracting the best candidates on an outside basis.
Our Safe-Engage tool is a handy way of managing IR35 risk. Safe-Engage is a process we have created to help public and private sector organisations safely engage contractors outside of IR35.
If you are a believer in outside-IR35 contracting, work in the Commercial or Digital Transformation space, and want to safely engage with your client or your contractor, we may be able to step in and be that medium. Check out our Programme Services for more information.