After IR35 reforms came into force last week, ContractingWorks presents a guest article from Kingsbridge Contractor Insurance on what the changes means for contractors.

With the off-payroll reforms here, contractors, fee-payers and end clients must ensure they are prepared for the changes. Hopefully, you are already well aware of IR35, but read on for an overview of what is changing with IR35, what would happen if you are placed inside IR35, and how your client might review your status.

How is IR35 changing?

Now that the IR35 reforms have come in to play with effect the 6th April 2021, if you are working for a medium of large client (as defined by Companies Act 2006), the liability for your IR35 status will shift from you as the contractor to your fee-payer. This could be your recruiter or the end-client, as it would depend on who pays you. For any engagements that started prior to the 6th April, the liability would still remain with you to pay to appropriate tax and any national insurance payments. Furthermore, the liability would stay with you in the event that the client you are providing services for is deemed as a ‘small business’. HMRC’s definition of a small business is that at least two of the following must apply:

  • a turnover of £10.2 million or less;
  • £5.1 million or less on its balance sheet;
  • 50 employees or less.

How will my IR35 status be determined?

Your client will review your contract in order to assess your IR35 status. They may use one of the following tools to help reach their decision:

  • A starting point for many contractors and end-clients is HMRC’s CEST Tool (Check Employment Status for Tax). Although this is free and can be a good place to start, 1 in 5 contractors who use the tool get an indeterminate result, which can cause problems. In this case, the only option given is to call HMRC. Mutuality of Obligation, one of the key IR35 status tests, is also somewhat overlooked in the tool, which has been criticised.
  • There are other automated tools available as well as CEST. However, these can also garner an indeterminate result.
  • Should a contractor or end-client want to ensure that they get a clear inside or outside result, the first port of call may be a fully manual tool. These offer a bespoke service, where the engagement is completely assessed by a human professional. Due to every contract being reviewed by a professional, this method can be slow and pricier.
  • The final option is a hybrid tool, which combines the best of manual and automated tools. A hybrid tool, such as Kingsbridge’s Status Tool, will make use of an automated tool, with manual intervention by an IR35 expert team for any indeterminate results.

Once your IR35 status has been decided, you will be provided with a status determination statement (SDS). If you are concerned about your IR35 status, you should talk to your fee-payer.

Assuming your client is assessing your IR35 status with an IR35 assessment tool, the results of the tool will be heavily reliant on the key status tests. 

What are the three main IR35 status tests?

Whilst there are lots of tests used to determine an IR35 status, based on case law there are three which are seen as the most important and that have the most weighting. These are Mutuality of Obligation, Substitution and Control.

  • Mutuality of Obligation, which you may have heard of as MOO, has been key in previous IR35 tribunals, particularly in high profile cases such as TV presenter Helen Fospero. To point towards being outside IR35, MOO would need to be absent from your engagement. The basis of MOO is that you are not obligated to accept further work from your client once the engagement is finished, and also your client should not feel obligated to offer you any further work.
  • Right to Substitution, also known as ‘lack of personal service requirement’, refers to including a clause in your contract that you are able to send a suitable candidate to complete the work if for some reason you are unable to. Being able to choose (and pay) for the substitute yourself would help point towards an outside determination.
  • Control is just as important and can swing an IR35 tribunal to being inside or outside. If your client is seen as having too much control over the way you work, it can make it look like an employer-employee engagement. This would of course depend on the engagement but can include things like micromanaging you or requiring you to work specific hours.

What taxes will I pay if I am assessed as inside IR35?

In the event that you receive an inside IR35 SDS, you will be taxed at source by your fee-payer. You will be taxed in the same way as if you are an employee of the business, so both income tax and employee’s NIC’s will be deducted from your payslip.

It’s worth noting that you do have the right to appeal an IR35 status decision if you do not agree with it, as from the 6th of April, clients must have an appeal process in place. They will then have up to 45 days to review your status.

How to check your IR35 status

Checking your IR35 status yourself with a reputable firm can help to swing your SDS in your favour. CEST, automated and manual tools are all options you could consider when checking your status. Another option you could use is Kingsbridge’ award-winning hybrid tool. For just £50 plus VAT, you can check the strengths and weaknesses of your engagement. You will get a full report, and if your result is indeterminate, it will be passed to their IR35 expert team for manual review. Purchase a review today here.

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