Navigating the Off-Payroll landscape hasn’t been easy for the contingent labour market and contractors have suffered at the hands of confused hirers and recruiters, many of whom have taken the path of least resistance and blanket banned all limited company contractors rather than adopt a compliant assessment strategy.
Now, six months later, as the dust settles, Dave Chaplin, CEO of IR35 Shield tells IWORK that by working together with clients to create an evidence-based defendable position, contractors can continue to secure contracts and demonstrate to HMRC that they are compliant.
Secure an ‘outside IR35’ contract
‘Outside IR35’ contracts do exist and once you have secured work on that basis, it is important for both parties to work collaboratively to sustain the IR35 status and ensure the working practices continue to demonstrate this.
Personal service, mutuality of obligation (MOO), and control are the three fundamental factors which are used to determine IR35 status.
There are now two versions of “IR35” in play – the original Intermediaries Legislation (Chapter 8 of ITEPA 2003), which applies where the client meets the small company’s exemption or is wholly overseas, and the updated Off-Payroll legislation (Chapter 10 of ITEPA 2003) that took effect from April 6th 2021. Whilst both are based on the concept of ‘deemed employment’, the tax treatment differs, and you’ll need to understand why.
Status Determination Statements are key
If a position is ‘inside IR35’, be sure to obtain a copy of a Status Determination Statement (“SDS”) and a copy of the contract on which it is based, then you can evaluate it for any flaws in the assessment.
If you’re going to dispute an assessment, you must make representations to the client, who is legally obliged to consider them and either change the status or provide reasons why they are standing by their original determination.
This means the hiring client becomes judge and jury, so is likely to dismiss any frivolous representations. You’ll need to provide representations just like an expert might prepare the pleadings for a case and highlight factual errors and misapplications of the law. You may decide to get help with this. Or you may decide that whatever you do, the client isn’t going to change their mind. It won’t change unless you try.
Calculate rate renegotiations
If you’re considering an ‘inside IR35’ engagement, understand the financial impact that the Off-Payroll rules have on your income. Working ‘inside IR35’ under the new regime will impose an employment tax liability on the end client and/or agency, and a tax hike, so knowing how much to increase your rate by for an ‘inside IR35’ engagement to be net income-neutral is important. But, bear in mind that hirers will want to renegotiate too and pass their new tax bill onto you by way of a rate reduction.
If the ‘inside IR35’ status determination has arisen because of a risk-averse client refusing to conduct an assessment, try renegotiating your rate to counter your tax hit.
The challenge some clients and contractors face is the impact of the withdrawal of tax relief on expenses previously claimable. For a contractor who travels and lives in accommodation near the client site during the week, if deemed ‘inside IR35’, they may need to increase their rate by up to 40% to maintain the same level of take-home pay, thereby making the hire completely untenable.
Beware of non-compliant umbrellas
Contractors should also tread with caution when considering using umbrella companies – as it is an unregulated market, many are tax avoidance schemes, and you are responsible for any non-payment of tax, not the scheme provider. The Off-Payroll rules have seen a rise in dodgy schemes with many contractors unwittingly duped into arrangements that have significant financial repercussions. The safest route is being on the client or agency payroll.
The dust is settling
In the “new normal” of Off-Payroll working, whilst contractors have few statutory responsibilities, it is vital to play an active role in the compliance process, understand the rules and work closely with clients to ensure the contractual terms align with the working relationship. The dust is settling as companies recognise the vital skills that contractors bring and are starting to engage limited company contractors again.