Taking the pain out of IR35

After all the turbulence of the last year, it seems tax law has now settled – which means the IR35 reforms are here to stay.

That means some headaches for employers and payroll teams working with contractors are here to stay too. But there are some simple steps you can take to avoid the worst of it.

What the IR35 rules are

The phrase “IR35” is short-hand for what HMRC calls “off-payroll working”.

This refers to situations where “contractors” work in a similar fashion to normal employees. In order to stop these situations being used to avoid taxation, HMRC requires businesses to essentially treat these contractors as employees for tax purposes. That means collecting income tax and National Insurance contributions from the fee paid to the contractor, then paying it to HMRC.

These apply both when a contractor runs their own business and when a client hires the contractor through a third party intermediary, like a labour hire service.

These rules have existed for a while, but it used to be up to the contractor or quasi-employee to make the determination. Since 2017 for public sector agencies and 2021 for the private sector it has been up to clients to make that decision on behalf of their contractors. This opens up serious potential tax liability if the wrong determination is made.

Questions to ask yourself about your contracting

While there are some black and white cases in IR35 decisions, many cases fall into a grey area, where one day of the week the contractor might act as a regular employee but on another they may not.

There are some questions to ask yourself about any arrangement that will help get your thinking into the right space.

Does the contractor have the right to send a substitute to carry out work if they cannot make it? An employee can’t do this – but a contractor usually can.

Who controls how the work is carried out? Contractors generally do this themselves, while employees generally follow processes set by their employer, with working hours and the like.

Who is liable if something goes wrong? If it’s the contractor themselves, this is a good sign that they are not a quasi-employee.

These are just signposts. Thankfully there is a tool you can use for some more solid peace of mind.

HMRC’s CEST tool

The Government is aware that these rules can be confusing, so they have created an online tool for both contractors and clients to assess the right settings.

The “Check Employee Status For Tax” (CEST) tool can be found here.

Importantly, the HMRC promises to stand by the results of this tool, if all the answers given remain accurate.

The best way to succeed with CEST is to prepare properly and be ready to use it again when things change.

Preparing properly means collecting all the relevant information for each contract, documenting it, and keeping it safe with backups. This can include:

• The timing of the work – when it starts, when it will be completed by, and the hours in which it will happen
• The contractor/worker responsibilities.
• Who has control over what work is required to be carried out.
• Who has control over when or where the work can be carried out.
• The way the contractor or worker will be paid.
• Whether any expenses will be reimbursed or benefits provided.

Most of this information can be collected before a contract is signed. While contractors themselves can use the tool, as the potentially liable end client you should make sure to do so as well.

Any new contract or new contract terms will need to be put through the tool again. Remember, the information needs to remain accurate, not just be accurate at the time that it is submitted. If the contract changes, even in a small way that you might agree verbally, go through the whole process again. It’s worth the peace of mind.

Could this change?

There is some talk that backbench Conservative MPs back change to these rules. After all, Kwasi Kwarteng was set to put the onus back on contractors in his brief tenure as chancellor.

That said, major changes to the underlying legislation look unlikely as an election approaches and the legislative agenda thins. The longer the reforms are in place the longer they are likely to stay, as everyone gets more and more used to them and shapes processes around them. Because of that it is imperative that everyone gets their head around the rules as they are – not as they would like them to be.

By Suzanne Gallagher, UK product manager at KeyPay

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