IR35 Determinations

On 6th April 2021, the rules governing IR35 for contractors and medium/large businesses changed, just four years after a near-identical change took place affecting the private sector.

The change of IR35 rules has had an effect. Nearly half of businesses recently told the Association of Independent Professionals and the Self-Employed (IPSE) that IR35 compliance had become a ‘significant administrative burden’. One in three companies now finds locating and securing freelance talent more difficult.

In this extended article, we take you through the current IR35 regulations as they stand from the perspective of employers.

To speak to IR35 determination specialists, please call CoComply on +44 (0) 203 051 9792, email [email protected] or fill out the form below.

Why was IR35 introduced?

The history of IR35 goes back to the 1970s although it was actually introduced in 2000 to stop the “Friday Monday phenomenon”. This is where an employee quits on Friday only to return to carry out the same role with the same responsibilities the following Monday as an independent contractor.

HMRC doesn’t like this arrangement because they lose out on a lot of income tax and National Insurance.

The average contractor in the UK earns £49,932.

If this contractor is a full-time, salaried employee, this nets HRMC a total of £18,922.71 in taxes each year. If the same person provides their services through a limited company, HMRC collects just £9,957.82 (assuming they pay themselves the annual tax-free allowance in salary and the rest in dividends). There’s also no employment law for companies to worry about with contractors.

For contractors and employers, going off-payroll makes sense but, to HMRC, it looks very suspicious.

And that suspicion led eventually to the creation of IR35 which was intended to root out what they consider to be “hidden employees” pretending to be independent contractors.

Who is responsible for determining IR35 status?

Since April 2017, public sector organisations have been responsible for determining the IR35 of contractors.

In April 2021, this rule was extended to cover medium and large businesses and charities. The definition of medium and large is as follows:

Annual turnover does not exceed £10.2m
Balance sheet value does not exceed £5.1m
Number of employees (full-time equivalent) must not exceed 50

In every IR35 determination, there is a fee payer and a client (often the same company or body). As supply chains become more complicated, typically with the introduction of a recruitment agency, things get more complicated.

This is particularly so for professional services firms (consultancies) that deploy independent consultants on longer-term assignments to clients, for example, fractional CMOs and part-time financial directors.

It’s often not clear who the end client is. Is it the professional services firm because you can bill the client? Or is it the firm to which they’re providing advice? This area represents a sizable risk for many organisations

We’ve written more here on who is responsible for determining IR35 status.

Who carries out an IR35 determination test?

There are multiple specialist private companies that offer an IR35 determination test, many of them insurance-backed coverage for your company taking care of all costs, fees, and penalties if they get it wrong.

You can get employment solicitors to check any current or future arrangements. Firms like CoComply provide IR35 compliance as an ongoing service from initial recruitment to release at the end of a contract.

The first stop for many companies, unfortunately, is HMRC’s own IR35 determination test.

What is HMRC’s IR35 determination tool?

HMRC’s IR35 determination tool is called CEST (Check Employment Status for Tax). It’s automated, online and you don’t have to book a time or pay to use it.

That’s great but it’s flawed – very flawed. The House of Lords questioned its fitness for purpose in a damning report. They also believe that “the support offered by HMRC in determining status – and the CEST tool in particular – falls well short of what is required.”

CEST has attracted negative headlines since 2018 because it’s not very accurate. ContactorCalculator determined from a sample of 24 cases taken to the First Tribunal that CEST was only 58% accurate although HMRC dispute this putting the figure at 92%.

The end of contractor IR35 self-determination

Prior to the changes in regulation, contractors were legally responsible for determining whether their working arrangements with an employer were inside or outside IR35.

That’s now flipped – you, as the employer (or “fee payer”), are. You’re now also responsible to pay the penalties if you make any mistakes. There is no more IR35 self-determination, unless you’re a small business.

What happens if the tool is unable to make a determination on IR35?

Sometimes, CEST will tell you that it is “unable to make a determination IR35” on a contractor’s status, even if you answer all questions fully and accurately.

If this happens to you, you should approach a specialist provider like CoComply, an employment solicitor or HMRC for support.

What is IR35 status determination?

IR35 status determination is the process you, the company benefiting from the work carried out by a contractor, undertake to determine whether your engagement with them is inside or outside IR35.

What determines IR35 status?

There are a number of factoring determining the IR35 status of your contractors but it essentially comes down to how much control you have over them. The freer the hand you give your contractors, the more likely they are to be outside IR35.

A contractor is likely to be a “hidden employee” if you:

Want them to submit to management monitoring, guidance or appraisal.
Demand that they are the only person to carry out their duties and that they can’t outsource some or all of the work to others they choose.
Do not permit them to quit at any point during an engagement until the contractor is completed.

These three guidelines only scratch the surface though. It’s far more complicated than that.

What are the standard IR35 status determination questions?

Standard IR35 status determination questions cover a wide range of factor including whether:

The contractor provides services through a limited company, partnership or unincorporated association
The contractor will hold an office like company director, board member, and so on
The contractor can send someone to do the work instead of themselves and who will pay for that other person
You have the right to ask the contractor to do something different to what was previously agreed
You can tell the contractor how you want the work to be done
You can stipulate the contractor’s working hours and where they work
You provide equipment for the work to be done or the contractor provides it (including vehicle costs and other costs)
You would have to pay for work to be put right or the contractor would

Although the CEST is comprehensive, companies should NOT rely on HMRC’s CEST test for determining status.

That’s even despite the fact that the taxman says that they’ll “stand by the result you get from this tool” subject to accurate information being inputted.

What is an IR35 status determination statement?

Under the new rules, you must present an IR35 status determination statement to your contractor (and their agent if applicable) before you make your first payment.

Companies must exercise due care in putting together their statements. You need to set out clearly within your statement why a contractor’s engagement is either inside or outside IR35.

What is an IR35 blanket determination?

An IR35 blanket determination is a document that deems some or all of your contractors as either working inside or outside IR35 en masse.

We would advise against this. HMRC are likely to conclude that your company has not exercised due care in discharging its IR35 declarations.

If HMRC ends up investigating your company and they find “hidden employees”, you will become liable by default because the blanket determination was wrong and you’ll be punished severely as a result.

Should I use an IR35 status determination statement template? (12)

IR35 status determination statement templates are available free on the internet. We recommend that you resist the temptation to download and use one.

HMRC is VERY willing to pursue IR35 cases at the First Tribunal (the taxman’s version of the High Court). Although their track record at securing victories is patchy, don’t put yourself and your business at risk of increased scrutiny on IR35 and other issues.

Ask yourself whether it’s really worth taking such a big risk with your business? The fines can be eye-wateringly large. If you do not own the company you represent and you’re the person responsible for advising the board, what would the consequences be for you if it went wrong, from a selfish point of view?

No more trust a free downloadable IR35 document than you would the promises of a politician.

CoComply fully outsourced IR35 service for end clients

We help at every stage of the process from helping you to understand the exact nature of the relationships you need with contractors in the first place to providing you with ongoing reviews of the contracts you have with your off-payroll workforce.

To succeed, businesses, charities, and public sector organisations need to bring in help from outside their organisations to meet the challenges they face and make the changes they need.

This is what we do whether you have just 1 contractor or you’re managing a team of 10,000. Fill out the form below to get in touch.