IR35: Inside or Outside?

Companies engaging contractors on a self- employed basis or via personal services companies are sure to be aware of the pending changes to the IR35 rules which take effect in April 2020.

According to XpertHR, many large employers in the financial sector are taking a low risk approach. They may choose not to engage with the new legislation and will be treating all contractors as inside IR35 in order to mitigate their risk.

What is Inside and Outside IR35?

From April 2020 private sector companies will have to decide whether their contractors are paying the appropriate amount of tax. Previously the onus has been on the contractor to determine their tax liabilities and status.

Genuinely self-employed contractors are deemed to be outside of IR35. However where a contractor is deemed to be inside IR35, HMRC expects the contractor and the employer to pay the same tax and NI contributions as other permanent employees. If a contractor is working within a role that, to all intents and purposes, could and probably should be filled by an employee, then the contractor will be working inside IR35.

The test for whether or not a contractor is inside or outside IR35 is similar to the test of employment status i.e. level of control, mutuality of obligation, whether the work needs to be performed personally. This opens up additional problems, for if a contractor is deemed to be inside IR35 it is theoretically possible that they are also an employee and therefore have rights to holiday pay and unfair dismissal rights.

HMRC themselves faced this very dilemma when one of their own contractors took them, and the associated recruitment agency, to employment tribunal. The contractor claimed that as she was deemed to be inside IR35, and forced onto an agency’s payroll, she was therefore an agency worker and thus entitled to holiday pay. She won her claim and was awarded £4,000 in owed holiday pay.

How will employers decide?

HMRC have launched a tool, CEST, to aid employers in deciding whether a contractor sits inside or outside IR35, however this tool has faced criticism.

From April private sector organisations will be obliged to present contractors with a Status Determination Statement which outlines and explains the reasons why they deem a contractor to be inside or outside IR35. HMRC have stated that providing employers can demonstrate that they have taken “reasonable care” in reaching their decision and have filed the appropriate tax documents, they should avoid being penalised.

Some believe the initial fear of hiring contractors will diminish overtime, which is what appears to have happened within the public sector. However, for companies who rely on many contractors, their talent strategy is likely to require an overhaul in the short term at least.

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