IR35 2020 – Thoughts from the Coal Face
ir35
hmrc
contracting
I’ve been contracting for over eight years now and in that time I’ve been careful to ensure that, to the best of my abilites, I operate in a manner that places me outside of the IR35 legislation. That is, to provide a service to my clients and not to be seen as an employee.
Currently it is my responsibility to determine the employment status of a role with regards IR35. I do this by having contracts independantly reviewed to ensure that they comply with the legislation and take steps to ensure that the actual working conditions are in accordance with service provision rather than employment.
If I get it wrong then it is down to me to justify my determination, in court if need be, and pay any unpaid taxes should I be unable to do so.
However, in April 2020 that determination could largely be taken out of my hands and placed in those of the fee payer, e.g. the client if I’ve been engaged directly or otherwise a recruitment agency that have facilited the engagement. HMRC have decided to make this change stating their belief that most contractors are incorrectly self-declaring themselves as being outside of IR35 and avoiding paying the correct level of tax.
They have not been able to substantiate these claims, despite repeated calls to do so – but that’s not the reason for this post.
There are a number of problems with this, seemingly subtle shift in responsibilities but, as I see it, the main one that a great many end clients have no concept of IR35 or how to interpret it. Until now they’ve really not had to worry about it – the contractor turned up, did the work and left again. The client paid the contractors Limited Company or the recruitment agency an agreed fee and life was simple.
From April 2020, fee payers that meet the size and turnover criteria will need to determine whether IR35 applies and is so deduct tax as source prior to paying the contractors company. However, the IR35 legislation is complex and confusing – with HMRC losing more cases than it wins it is clear that they don’t fully understand it either.
If, in the eyes of HMRC, the fee payer gets the IR35 determination wrong and have deemed a contract to be outside of the legislation instead of inside then they will be responsible for paying the overdue tax – which may not be trivial. So what do we think clients are going to do? Are they going to invest the time into understanding IR35 so that they can defend and ‘outside’ determination or just take the ‘easy’ route?
Well, in spite of HMRC saying it wouldn’t happen, many major clients, particularly in the banking sector, have already stated that they will either not be engaging with contractors after April 2020 or will be considering ALL contract positions to be within IR35. That way they will stay on the right side of HMRC and everything is simple again.
The problem is that while HMRC may be happy with this, afterall they will be receiving additional revenue from these blanket IR35 determinations, many contractors are not.
Without getting into the nitty-gritty of IR35 it is not easy to see the problems that this will create for contractors but I think that there is an opportunity to educate the clients here. To make them aware of the difference between contractors, who provide a business-to-business service, and their permanent employees.
Provision of Services – A ‘Tradesperson’
First of all imagine that you run a company and want to freshen the office up a little bit.
You contact a decorating company and explain your requirements and agree on a price and timescale for the work. The company duly send a suitably qualified decorator to your site, you tell them what you want done and they get on and they get on and do it.
When they are done they leave and if you are happy with the work you pay the invoice.
So, what have you done here?
You have engaged with a company to provide you with a service. They have sent one (or more) of their employees to carry out the work and then invoiced you for that work.
The key here is that the company has provided you with a service – you have not directly employed the person who arrived to do the work. You don’t need to pay their taxes or into their pension. If they are unavailable the company can send someone else, suitably qualified of course, to continue with the work.
If the work was scheduled to take a week and it’s finished in three days then you are not obliged to provide additional work to fill the time – and neither is the decorator or company obliged to accept it if you do. The engagement was for a set piece of work and once that is done the engagement is over.
Now, I think that’s pretty straightforward and nobody should have a problem with that. But the thing is that the provision of service is somewhat clear cut; you have engaged with a company who provide services that your company is not skilled in.
Provision of Services – Contractors
Imagine now that you run a company which has a Software Development aspect to it and you need some additional resource to fulfil a project on time.
You reach out, directly or via an agency, to a company providing contracted software development services, explain your requirements and agree on a price and timescale for the work.
The contractor arrives on site, is told what needs to be done and gets on and does it.
Once the work is completed there is no expectation that further work needs to be offered or accepted and the engagement is over.
During the engagement should the contractor fall ill there is no expectation that their services will be invoiced unless they are able to send a suitable replacement (at the contracting companies cost) to continue with the work.
Does this sound familiar? It should do – it’s pretty much the same as the previous example with the decorator.
The difference is that the service being provided is something that your company already does and the contractor is probably expected to work within an existing team.
This is where the lines start to blur and the grey areas start to appear.
Why does this make a difference?
With a contractor more embedded in the business and it’s team it is easy for the client to see them as an employee and attempt to treat them as such.
I’ve had instances where a client will attempt to dictate my working hours (despite working a standard 7.5 hours) and my dress code (I was wearing a polo shirt with my company branding).
Would the client feel able to do this with their decorator? I think not.
If they arrive at 9 and leave at 3 but get the work done to the required standard and complete the job on time then surely that’s what matters. If the quality isn’t there or the job isn’t finished then that’s another matter altogether.
The client wouldn’t expect to be able to dictate the dress code for these external workers, or when they take their lunch breaks so why expect to do it with a contractor?
I may well sound like a bit of a diva here – I mean, who do I think I am? But this is the reality of the matter. The client has engaged my company, directly or indirectly, to provide a service – I am not their employee.
Now, in order to integrate into a team a contractor will normally work similar hours but their hours should only really be dictated by their ability to access the building (assuming they are working on site).
I will obviously make efforts to integrate with the team and working conditions but this is in order to maximise the value of the services I provide – I’m kinda old school like that.
The Take Away
I believe that unless clients can understand this concept then they will have little chance of being able to make an accurate determination of employment status.
If they see contractors as employees, albeit temporary, then they will simply not grasp the importance of determining an accurate employment status with regards IR35.
It may well be that a particular role is correctly deemed to be within IR35 and if this is the case then that’s fine.
However, clients should avoid taking the stance that all contracts are within IR35 – doing so will not only damage the contracting industry in the UK but the client will also severely hamper their ability to engage with an experienced, temporary and flexible workforce to delivery their project and products.
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