IR35 was HMRC’s attempt to ensure that workers who were employees one day couldn’t change their employment status the next! Some employees were becoming self-employed or using their own limited company (a Personal Service Company PSC) for the same employer.
They were doing the same work under the same employment conditions and paying less tax and National Insurance than under a PAYE scheme.
What happened then?
New legislation moved the onus of proof to the employer to show that the worker was not caught by IR35. If the employer had not carried out adequate and reasonable assessment of the status of the worker, then the employer would be liable for the tax and NI that should have been collected under deemed PAYE arrangements.
This was first implemented in the public sector in 2017, in Government departments and the BBC. There has been quite a bit of press coverage since of court hearings into celebrities’ tax cases.
Moving the onus from the worker to the employer had the inevitable result. Irrespective of whether you were a bona fide subcontractor or not, the public bodies’ reaction was to treat everyone working for them as being inside IR35 and deduct tax and NIC from any payment made to the worker.
A blanket approach, whilst not technically correct, is easily understandable and the next part of the process was forewarned by HMRC.
What’s happening now?
From April 2021, HMRC applied the same rules to the private sector. It is too early after its introduction, especially with the pandemic lockdowns, to judge whether the private sector is behaving in the same way as the public sector. But I tend to think it will not, as employers implicitly behave fairly towards their workers and will take each case on merit.
How do you get an employer to agree you are self-employed?
The most important document to be relied upon when you are trying to establish a non-employer/ employee relationship is a contract for services. It is essential that you should act in your work in accordance with the agreed contract. If you should deviate from it, there is a risk that you will be caught by IR35.
There are several principles that need to be established in the contract including:
- Mutuality of obligation (MOO)
- Direct supervision and control
- Substitution and financial risk amongst others.
Satisfaction of one of these factors doesn’t necessarily protect you from deemed employment but the more that is covered by the contract the likelier it is that IR35 will not apply.
What should you do?
- Have a strong contract for services in place.
- Act in accordance with the contract.
- Make sure you undertake all of the activities associated with running a business.
- Ask the employer to reconsider its decision if they decide to include you under IR35.
- Is the employers’ introduction of a blanket policy of including all workers inside IR35 appropriate.
- Ask us to obtain a review of your contract and working practices.
- Although this post is not primarily about finance, getting it right will, in all likelihood, save you money, time and not being deprived of the cash paid to HMRC prematurely.