IR35 Changes 2020 – Guidance for Contractors

The UK's IR35 legislation ensures that contractors pay the same tax and National Insurance contributions as an equivalent employee. New IR35 changes will be implemented in April 2020 for private sector contractors that will transfer responsibility from contractors to large and medium companies to assess IR35. The 2020 reform will bring public sector IR35 in line with the public sector, where the reform was implemented in 2017.

This simple plain-English guide for contractors explains the IR35 changes, how contractors will be affected, how to avoid IR35 non-compliance, and how Taylor Hopkinson are managing the IR35 reform. For further information on contracting, visit our contractor hub.

Updated: 6th December 2019
If you’d like to stay up-to-speed on our IR35 guidance, you might like to subscribe to our weekly email and we’ll let you know when we update this article.

Table of Contents
IR35 – Off Payroll Working Rules April 2020
What is the proposed change to IR35?
Small Company Exemption?
Making the status determination – “inside IR35” or “outside IR35”
When the Off Payroll Working Rules (“IR35”) apply
Assignments “Outside IR35”
Assignments “Inside IR35”
Incorrect determination
What are Taylor Hopkinson doing now to prepare for the IR35 changes?
IR35 FAQs
– I work for lots of clients, does IR35 still apply?
– The client does not understand / will not apply the new IR35 rules, do I need to worry?
– Can I be involved in the client’s status determination?
– I do not agree with the client’s status determination, can I appeal it?
– Can I be forced to pay for employer’s NICs?
– Do I get employment rights if I am “inside IR35”?
– My assignment is for 2 years – is it automatically “inside IR35”?
– Determining whether the assignment is inside or outside IR35
– Substitution
– Control and Direction
– Mutuality of Obligation
Further Reading and IR35 Resources

IR35 – Off Payroll Working Rules April 2020

Following the introduction of IR35 reforms in the public sector in 2017, HMRC has confirmed that the new rules will now be extended into the private sector, effective 6th April 2020. These changes are not retrospective. IR35 rules were originally introduced in the UK in 2000, with the intention of ensuring that individuals who are working like employees but who operate via an intermediary, such as a personal service company (PSC), pay broadly the same tax and National Insurance Contributions (NIC) as an employee would. IR35 rules have, however, been largely ineffective as the PSC has had to ‘self-assess’ whether the rules apply. Consequently, HMRC estimate that there is widespread non-compliance which they have been unable to effectively tackle.

What is the proposed change to IR35?

The reform will place the responsibility for assessing whether IR35 applies onto the private sector end user (our clients) of the worker’s (our contractors) services, for all payments by medium and large businesses from 6 April 2020. Where it is concluded by the end client that IR35 applies, the fee payer (in this case Taylor Hopkinson) will become responsible for accounting for and paying the related tax and NIC, including the additional cost of employer’s NIC, to HMRC.

Small Company Exemption?

The new Off Payroll Working Rules will only affect medium and large private sector organisations, so “small” end clients are set to be exempt – the definition of which is based on the Companies Act 2006 definitions. However, from April 2020, based on criteria below, our Clients are deemed to be medium-large businesses and therefore will be responsible for carrying out an assessment to determine whether Limited Company contractors’ roles are inside or outside IR35 legislation. If your role is deemed to be inside legislation, you will be subject to PAYE and NICs deductions.

The new rules will only apply to medium and large businesses in the private sector who are the end user of the worker’s services and to the fee payer, if different, such as fee payers in the recruitment sector. The Government have indicated that they intend to use ‘similar criteria’ to that found in the Companies Act 2006 to define a medium-large business. Under current legislation this is broadly a business that has two or more of the following features:

  • a turnover of more than £10.2m
  • a balance sheet total of more than £5.1m
  • 50 employees or more

Making the status determination – “inside IR35” or “outside IR35”

From 6 April 2020, it will be our clients’ responsibility to determine whether the Off Payroll Working Rules apply, i.e. is this assignment “inside IR35”? You can refer to the HMRC guidance and the employment status for tax (CEST) tool. Although feedback Is varied, the CEST tool does give you a good steer of the approach taken by HMRC and the indicators that they are looking for. HMRC have confirmed that they are making enhancement to the CEST tool, these changes are expected to be delivered before the end of 2019.

When the Off Payroll Working Rules (“IR35”) apply

The off-payroll rules apply if as a worker you provide services to a client through an intermediary (your personal service company (PSC)) but would be classed as an employee if you were contracted directly with the client. Before 6 April 2020 it Is your limited company’s responsibility to decide your own employment status for each assignment.

6 April 2020, how the rules are applied will change. All public sector authorities and medium and large-sized private sector clients will be responsible for determining whether the rules apply – i.e. are you “inside IR35” or “outside IR35”? Where the private sector client is considered “small”, your limited company will remain responsible for deciding the contractor’s employment status and whether IR35 applies.

Assignments “Outside IR35”

If the client makes the status determination that an assignment is “outside IR35”, they must ensure that “reasonable care” was taken during the decision-making and that the decision itself is reasonable. If the client does not exercise reasonable care, the status determination statement will not be valid, and the client will be liable for the unpaid taxes. HMRC have confirmed that it will issue detailed guidance in late 2019, which will include further details on “reasonable care”.

Assignments “Inside IR35”

If the client determines that an assignment is “inside IR35”, several options are available to you in terms of an alternative to an off-payroll model. The options are:

  • “Inside IR35” PSC – Should you wish to continue to engage as a contractor via your PSC who is deemed “inside IR35”, Taylor Hopkinson will calculate a “deemed employment payment” using the RTI (Real Time Information) payroll system. The deemed employment pay rate is your income after deductions, including both employee and employer NICs and the Apprenticeship Levy
  • Umbrella Company – Where an umbrella company employs you as a worker directly, the off-payroll working rules do not apply
  • Neither worker rights nor stakeholder pension rights apply. No expenses allowance applies

Incorrect determination

If the off-payroll proposals are legislated in their current form, where HMRC disagrees with the determination made, it can investigate and insist on back payment of tax, as well as fines for late payment from the fee-payer.>

What are Taylor Hopkinson doing now to prepare for the IR35 changes?

We are preparing for the proposed new rules and monitoring all Government and industry announcements throughout late 2019 and into 2020. Final announcements around updates have yet to be clarified, however, we are regularly attending seminars and open sessions, monitoring news from Government consultation process, as well as research and planning internally and through external advisors;

  • Taylor Hopkinson have formed a working group internally across Finance, Operations, Contracts, Compliance and Senior Management functions, and meeting regularly to review and plan strategy.
  • We are communicating with our clients to determine the status of workers who operate via ‘off-payroll’ arrangements, such as PSCs, who could potentially be captured by IR35. This assessment will be completed for new roles and then on a 6-monthly basis through the duration of contracts to maintain compliance, and we commit to communicating results and offering compliant payroll solutions to all contractors whether deemed ‘Inside’ or ‘outside’ IR35.
  • Taylor Hopkinson commit to maintaining a consistent open dialogue / knowledge-share with you our contractor throughout this period to ensure a proactive and educated response to the changes as they unfold. We are committed to continuing to provide a professional service proposition to you and will work to retain compliance and transparency throughout this time of change.

IR35 FAQs

I work for lots of clients, does IR35 still apply?

The Off-Payroll Working Rules will still apply irrespective of how many clients and assignments a contractor is working on. There is the argument that if you are working on multiple projects for various clients, this will demonstrate that you are in business on your own account as an independent contractor, and therefore fall “outside IR35”. However, your IR35 status is assessed on an assignment basis – working for multiple clients is not a significant indicator of being in business on your own account; the IR35 status for each assignment is judged on its own merit.

The client does not understand / will not apply the new IR35 rules, do I need to worry?

From April 2020, all public sector authorities and medium and large-sized private sector clients will be responsible for deciding whether IR35 applies. If the client either 1) fails to make a status determination, 2) fails to pass the status determination down the supply chain, or 3) fails to take reasonable care when making the status determination; the client ( or Taylor Hopkinson as the recruitment agency) may be liable for the tax and NICs as the deemed “fee-payer”.
We will continue to engage with our clients and you as a contractor regarding the new rules to help to ensure that all parties are prepared for April 2020. It is important that clients exercise reasonable care when making a status determination, given the issues that arose from the public sector reform in April 2017 as a result of blanket “inside IR35” determinations.
If you are providing services to a small private sector client, they will be exempt, and they are not required to follow the new IR35 rules. Your PSC will remain responsible for determining your IR35 status and making the appropriate tax deductions and NICs.

Can I be involved in the client’s status determination?

It is expected that you will be involved to some degree in the client’s status determination process, as there are some questions in the HMRC CEST tool or similar tools which have been created, which require the contractor’s input – for example questions on how you run your business. However, there is no statutory right for a contractor to be consulted during the status determination process.

I do not agree with the client’s status determination, can I appeal it?

The draft legislation imposes an obligation on the client to provide a “client-led status disagreement process”, either the recruiter or the contractor may disagree and follow the process. The client must respond to a request to review the status determination statement within 45 days. The client must either confirm the determination is correct, with reasons, or provide a new status determination statement reaching a different conclusion and withdraw the previous one.
If you disagree with the client’s determination, you will need to write to the client and give reasons why. You need to ensure you keep records of status determinations and any corresponding disagreements. During the dispute process the client’s determination stands.

Can I be forced to pay for employer’s NICs?

Recruitment businesses cannot lawfully deduct secondary NICs from an agreed fee, but recruitment businesses may adjust the contractor’s pay rate to factor in the additional costs of supply which include employers’ NICs. Depending on your contractual terms, there may be scope for the rate to be negotiated accordingly.

>Do I get employment rights if I am “inside IR35”?

Should you wish to continue operating as an “inside IR35” contractor, you will not benefit from any “employee rights” such as holiday pay, sick pay, pension contributions, dismissal rights etc. You may receive these benefits through your employment in your PSC.
If your assignment falls “inside IR35”, it is likely that you are no longer in business on your own account and could be within scope of the Agency Worker Regulations (AWR). Under AWR, you are entitled to comparable pay to a permanent employee on the client site. If you opt to engage via an umbrella company, you are an employee of the umbrella company and therefore you will benefit from employment rights and AWR will apply.

My assignment is for 2 years – is it automatically “inside IR35”?

The 24-month rule is in reference to claiming travel expenses. This rule has no bearing on the IR35 status of an assignment.

Determining whether the assignment is inside or outside IR35

To determine whether a contractor will fall Inside IR35, key criteria are reviewed to establish employment status. A decision is made about a hypothetical contract between the contractor and the end-client, and whether, if those two parties were contracting directly, there would be an employment relationship. However, the route to determining employment status is fact-specific and in some cases, there is no clear outcome.

It is worthwhile working through HMRC’s employment status for tax test and entering different responses to gain an understanding of the different outcomes. Essentially, if a contractor has similar working conditions, responsibilities and control as an employee of the client would have, then they are likely be classed as “inside IR35” (i.e. the Off Payroll Working Rules apply). Case law is evolving constantly in the tax tribunals, courts and employment tribunals but the key factors that determine a contractor’s IR35 status are as follows:

Substitution

A genuine right of substitution has long been deemed to be a very important factor when demonstrating that a contractor’s assignment falls “outside IR35”. For a substitution to be considered valid, the right to supply a substitute must be a genuine one. This means that the client must agree to it in practice, the contractor must pay for the substitute, and it should be an unfettered right. An unfettered right of substitution means that a client must accept a substitute if the initial contractor is unavailable. HMRC have now qualified the criteria within the CEST question on substitution, which states that a client’s need to be satisfied that the substitute has the skills and experience required or to ensure the substitute is approved under their security processes does not negate the right of substitution.

Control and Direction

In most cases where professional services are provided, it is important that a contractor can demonstrate a certain amount of autonomy in the way they undertake a project. Both the written contract and working practices must show that the client has no influence over how the contractor performs his/her services.
Control factors that may point towards an “inside IR35” status include:

  • Indicating that the contractor will be supervised
  • Including any “staff” benefits (including holiday or sick pay)
  • Including start/end/break times
  • Contractual clauses that specify any rights of control or supervision over the contractor.

The reality of the situation is that the individual is responsible for the delivery of the services. The individual will determine and control how and when they provide their services to the client, if they meet client-specific targets or project completion dates. It is worth noting that any clauses referring to control should be reflected in both the first tier (between recruitment business and client) and the second-tier contracts (between recruitment business and contractor).

Mutuality of Obligation

This is a hotly disputed area of law, as the position of HMRC is different from that of many practitioners and case law. It is an obligation between the parties to provide and accept work. In an employer/employee relationship, mutuality of obligation is easy to establish. However, in client/contractor relationships, it is less clear. HMRC states that by having a contract agreeing to provide services, mutuality is established but most experts consider the legal picture to be more complex. It is likely there will be more clarity on this in the coming months.
Other factors include:

  • Provision of equipment
  • Any absence procedures
  • Continuity of the engagement
  • Termination agreements
  • Notice periods
  • If the contractor has become “part and parcel” of the organisation.

Further Reading and IR35 Resources

HM Government Good Work Plan, December 2018 (PDF)

IR35: working through an intermediary (gov.uk)

Guidance: Off-payroll working through an intermediary (gov.uk)

Policy paper: Rules for off-payroll working from April 2020 (HMRC, 11th July 2019)

Share on linkedin
Share on twitter
Share on facebook
Share on whatsapp

Insight and opportunities

Join 1000s of professionals

Jobs and industry news sent to your inbox weekly.

Give us a call

Phone Directory

Out of hours Contractor’s support
Glasgow – Head office
Operations, sales, finance & marketing

How can we help?

Email us

All About Renewables

Every Tuesday we email the latest opportunities, industry insights, news, and events.

Unsubscribe anytime