IR35 refers to a piece of legislation published by HMRC. Introduced in 2000 its purpose is to eliminate tax manipulation/advantages received by contractors operating as perceived ‘disguised employees’. Essentially, it became apparent that contractors were being compensated for assignments that would be suited to a regular permanent employee through their own Private Service Companies. Thus, allowing offset of expense, dividend payments, etc. which made their operation/income more tax efficient.
In an attempt to reduce this type of operation HMRC introduced IR35. As you read this, a major IR35 milestone is approaching – from April 2021 all private sector contracts will face determination and scrutiny as to whether they fall within IR35 guidelines or not.
This determination is based on many factors including “reasonable care”, supervision, control & direction, personal services/substitution, mutuality of obligation, provision of equipment, financial risk, and more. The bad news for contractors is that the determination of each assignment is the responsibility of their end client rather than themselves, leaving them somewhat out of control.
Of course, there is a process by which the determination can be challenged – an appeal can be raised which allows 45 days for a structured response. Upon resolution, the determination can either change or remain if suitable justification is provided.
There are a few platforms available that have the capability to determine the status of a contract by producing a Status Determination Statement (SDS) based on assignment parameters, along with providing insurance for the assessment and determination. Using such a method would ensure the entire supply chain against any future challenges raised by HMRC.
Previously contractors had the right to assess their own contracts but from April 2021 the end client/hirer will be responsible for providing the determination and communication of the result through the supply chain. The “fee payer” whether that is the recruitment agency/ RPO/ PEO or Umbrella Company will then be liable for processing the correct Tax and NI deduction. These new parameters will pertain to all clients, aside from those defined as ‘small companies’ by the Companies Act 2006.
Many businesses are in the process of having their contracts reviewed along with their working practices. A few have considered “Blanketing” the determination along with strategizing their future hiring decisions. However, making project-wide determinations without reference to each individual contract would not appear to demonstrate sufficient care or consideration to each case.
At Umbrella in a Box, we see ourselves as the champions of the no risk approach to owning your own company and thrive in delivering a true, compliant employment and payroll service for owners and contractors alike. If you would like to hear more about our management services and bespoke software solution to getting contractors paid correctly and on time, please get in touch.