Is there any point trying to understand the IR35 rules anymore?
If you have been working as a contractor in recent years, you will know there are big changes to the Off Payroll Working rules coming into effect next month. You may be forgiven for asking yourself “is contracting dead in the water?”.
What is IR35 about?
The IR35, or off payroll worker rules, are about determining if an individual operating via a personal service company would be deemed an employee, or not, if there was no company in the way. When the rules should be applied is not changing, just who is responsible for deciding.
What is changing?
The IR35 rules have become largely irrelevant as the larger clients (or end users) have made the decision either they will no longer work with personal service companies or have a general policy that all contracts are deemed caught, regardless of the facts.
The changes coming in on 1 April 2021, make it the end user’s responsibility to decide if their contractors are caught by the rules or not. They face the risk of being left with a large tax bill and significant fines if they get it wrong.
Why are they changing it?
When HMRC proposed these changes a few years ago, they estimated that 1 in 10 contractors were not applying the rules correctly. If anything, this is likely to be understating the problem!
IR35 was originally brought in during 2000 but HMRC have never really enforced the regulations with any vigour and so it is fair to say it has largely been ignored. The problem has always been that HMRC simply do not have the resources to police it because this would require dealing with each contractor one at a time.
They now only need to enquiry into one end user and will potentially tackle hundreds of contractors in one go.
Why do the rules not matter anymore?
As the rules are by no means clear, end users have generally opted to deem all contractors are caught by these rules, regardless of the actual circumstances and whether they would be caught or not.
In most cases end users are pushing contractors into umbrella schemes which will deduct PAYE style tax. Although some contractors with key knowledge and skillsets, the end users are taking the opportunity to bring them in house to tie them in with lucrative employment packages, share options and the like.
There are now very few contracting roles on the market which do not say the role is within IR35. The announcement in this year’s budget of an increase in corporation tax to 25% in 2023, is set to be a further nail in the coffin of personal service companies.
The real question is what should contractors do now?
Most end users are giving contractors a list of the approved umbrella providers and employment agencies for them to sign up with. Some schemes will put the individual on a payroll directly and some will look to deduct the PAYE style tax and National Insurance from the company invoice.
Are umbrella schemes dodgy?
In the past umbrella schemes have often been associated with the more aggressive tax structures out there and not all of them worked! However, end users are being careful with which providers they approve as HMRC has the right to go up the chain to the end user when chasing any unpaid tax and issuing penalties.
Ensure any provider you are considering using are FCSA accredited as they will be monitored to ensure they are run correctly.
Day rates and other costs
In most cases the day rates being offered have been calculated to take account of the impact of the cost of employers NI, holiday and sick pay.
Although the day rate may vary between an umbrella scheme and going on a payroll, the amount of take-home pay after all tax and other deductions will generally be similar. The only real variance is the admin charges of the scheme providers.
Why is it so complicated?
It is best explained if we use a real example. In the latest in what is becoming a long line of IR35 cases HMRC has brought against TV presenters, we have seen the same key issues of control and mutuality of obligation being raised yet again.
This case relates to the employment status of Kaye Adams in relation to long running BBC Radio programme The Kaye Adams Show. HMRC lost the case and here is why.
Mutuality of obligation
You may, quite rightly, be asking what does “mutuality of obligation” even mean? Basically, it is referring to the obligation in employment contracts, the employer is to provide the work and the employee is to undertake that work – so both sides being mutually obligated.
In this case, although the show ran for 5 years and the contract had a minimum requirement of 160 shows, her contract did not make her services exclusive to the BBC. In fact, Ms Adams had worked for other shows and broadcaster on a one-off basis over the same period.
The uncertainty of the industry she worked in and the fact that projects could come to an end without notice (and therefore no obligation) is part of the ebb and flow of freelance work and was found to be consistent with her being an independent contractor.
In Kaye’s case the BBC had the right to determine the content and form of the shows, which HMRC claimed gave them control. In practice though, the BBC had given Kaye a high degree of autonomy (and therefore control) in relation to the content and structure of the show.
She was found to be an “expert” in creating such shows, with a proven track record and this, with the lack of the BBC using its right to control, helped the verdict to go against HMRC.
What hope do end users have of getting it right!
This and other recent cases show the complexity around IR35 cases as contracts become more and more flexible and the line between employment and self employed becomes more blurred. HMRC have lost a number of these cases, showing they seemingly do not have the same understanding of the rules as the tribunals!
Indeed, HMRC’s online IR35 checking tool still does not include mutuality of obligation despite this being one of the key points raised by the tribunals in all the recent cases. If HMRC cannot get the rules right, how do they expect end users to?
What about contractors working for small companies?
These new rules do not apply for small company end users so contractors working for them still get to decide if the IR35 rules should be applied. This break was given to small companies following the initial consultation on these changes a couple of year ago, only time will tell if this remains.
The reality for contracting is that PAYE style tax and National Insurance is going to be deducted in most cases going forward. The only real choice contractors have is which provider on the end user’s approved list they choose or do they go and do something completely different!
If you would like discuss this further you can email Ian firstname.lastname@example.org