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Dave Chaplin from ContractorCalculator and IR35 Shield explains how contractors and firms need to prepare for the changes that are going ahead next year when it comes to Off-Payroll tax legislation.
We recently learnt that Off-Payroll tax changes will go ahead from April 2021, despite valiant efforts by the opposition parties and Conservative MPs who supported an amendment for the legislation to be delayed for a further two years. Contractors and firms hiring them will now need to prepare so that, with some careful planning, no-one misses out.
Contractors should still be able to secure ‘outside IR35’ engagements and firms should have nothing to fear provided they follow the highest standards of IR35 compliance.
Dave Chaplin is CEO and founder of ContractorCalculator and IR35 Shield as well as author of IR35 and Off-Payroll – Explained. Here he outlines what all parties can do to keep client/contractor relationships beyond the scope of IR35 now and from April 2021.
The original Intermediaries Legislation will remain in place and will operate as it always has, but only apply to contractors operating via limited companies who provide their services to small firms. The new legislation, which has fundamental differences, applies to medium and large firms that hire contractors who operate via limited companies.
From a timing perspective, and to avoid disruption, firms will need to focus their efforts on any contractors they hire whose contracts overlap with 6th April 2021. From our experience last year, whilst we helped some large firms make preparations during the summer, most firms started to tackle compliance from early September onwards.
Under the Taxes Management Act 1970, HMRC has powers to go back up to four, six or 20 years to recover taxes that were due. These “enquiry windows” can only be opened under certain conditions and firms that adopt the highest standards of IR35 compliance should only need to prepare a defence for a rolling four-year window.
Firms that make a flimsy attempt at status determination and ignore the vital ongoing compliance activities thereafter could very likely find themselves in “carelessness” territory, with the full six-year window being available to HMRC. Carelessness could attract additional penalties, which is why it is wise to take a belt and braces approach.
It is important to recognise that HMRC has the power to form an opinion that tax is due, and then the taxpayer will need to prove their innocence by providing compelling evidence to the contrary, possibly at a tribunal.
Long-term thinking is fundamental to specialist tax defence firms, like IR35 Shield, that design and implement IR35 defence strategies. They are focused on the long game and should help ensure that you will be protected in four or six years’ time and that you will not be turning up at tax tribunal empty handed.
Working practices are scrutinised to determine IR35 status. The contractor’s working practices could indicate an employment relationship if the hirer takes control of how contractors should do their job, what they should work on and where or when they can work. These are elements of control, forming a key part of case law for decades, which indicate that a master/servant relationship has been established.
Another key distinguishing factor is that self-employed engagements do not create sufficient mutual obligations. There are no guarantees of ongoing work, and contractors only get paid for work actually done.
It is beneficial to contractors if they can demonstrate that they are in business in their own right. Having business cards, a website, personal laptop and home office can be useful pointers to self-employment, but they are secondary factors. Having concurrent clients and demonstrable activities of marketing and winning business are also useful pointers.
But ultimately, personal service, control and mutuality of obligation are the main factors that are closely examined in case law to determine whether contractors are “deemed employees”.
The contractual paperwork must align to the reality of the engagement. Lazily drawn-up boilerplate contracts that have not been sanity checked by IR35 legal experts are a recipe for disaster at subsequent investigations and tribunals.
If you plan to hire contractors on an “outside IR35” basis, then make sure you get the contracts checked by experts in the field. Bear in mind that HMRC takes three to five years to train their own status inspectors, and even they may struggle with cases.
Whilst self-proclaimed “IR35 experts” will continue to pop up in the UK over the coming months, the reality is that there is a very limited pool of professionals who have enough detailed knowledge of the subject. Their experience gained over the last two decades puts them in a position to understand exactly how contracts are picked apart by HMRC lawyers and barristers at tribunal. A solid defence starts by considering what could happen in four to six years’ time, and then working backwards to shore up the defence.
The following steps should be taken by contractors and hirers to ensure that the relationship stays on the intended “outside-IR35” track:
1. Assess IR35 status comprehensively
2. Ensure the contractual terms align with the relationship
3. Agree and sign a Status Determination Statement (SDS)
4. Make sure the engagement operates in alignment with the original intent
5. Collate supporting evidence throughout the contract
Firms should keep a record of each separate contract engagement going back six years. It pays to be prepared. Should HMRC conduct a tax inspection and dispute the status of an engagement, the evidence will be essential to help defend the position at a First Tier Tax Tribunal.
Those firms that refuse to engage with legislative changes are at risk of increased project costs and recruitment struggles. However, with the right strategy, firms should have no issues when navigating the new rules and ensure that they can continue to hire genuinely self-employed contractors.
The contractors themselves, whilst they assume no statutory tax risk under the new Off- Payroll legislation, will still need to understand it. By doing so, they will be able to help steer and educate their clients and ensure that they operate on a legitimately ‘outside IR35’ basis.
With a plan in place, ready to execute as the legislation approaches, all parties can continue to operate with confidence.