By Sarah Henderson, Kingsbridge Group.
IR35 is government legislation which is there to detect self-employed people who are actually ‘disguised employees’ and to ensure these people pay the correct amount of tax and NICs. Also known as off-payroll working rules, currently it is down to the contractor themselves to declare themselves as inside IR35 (effectively an employee) or outside IR35 (genuinely self-employed) and to pay the appropriate level of contributions to HMRC.
That is all set to change in April 2021 when private sector IR35 reforms come into play. These will make the declaration of a contractor’s IR35 status the responsibility of their end-client, while the liability for tax falls on the fee-payer. This means that some contractors could find themselves incorrectly declared inside IR35 and forced to pay tax and NICs at source, and at the same levels as employees, just without all the workplace benefits enjoyed by actual employees. However, if you are incorrectly deemed outside IR35, then the fee-payer becomes liable to pay all penalties, taxes and interests. Right now, though, that liability still lies with you, the contractor. This legislation was originally due to come in to force in April 2020, but was delayed because of the global pandemic. It is highly unlikely that it will be delayed again.
What could losing an IR35 investigation mean for you?
Losing an IR35 investigation could mean having to pay out a lot of money to HMRC, never mind legal costs. At the end of the day, IR35 is a revenue spinner for HMRC so, when they go after someone it’s usually because they believe they owe a lot.
Take one of the cornerstone IR35 cases, for example: Jensal Software. This case saw an IT contractor successfully appeal his tax bill, issued because HMRC wrongly believed him to be inside IR35. The case was defended by Andy Vessey (Head of Tax at Kingsbridge), who said “HMRC ignored more than sufficient evidence which showed the working arrangements belonged outside IR35.” In other words, the case should never have got that far to begin with. However, had the defendant lost, he would have had to pay up an eye-watering £26,000 in taxes alone.
TV presenter, Eammon Holmes, meanwhile, famously lost his IR35 appeal against HMRC who claimed he had acted as a disguised employee of broadcaster ITV while carrying out work for them via his personal service company (PSC). The tax bill he faces is a reported £250,000. Factor in penalties, legal costs and interests and you have to ask whether or not you could afford to pay a bill of this magnitude – and what would you have to do if you couldn’t?
Realistically, the best way to protect yourself, your savings, and any assets from potential bankruptcy as a result of an IR35 investigation is to ensure you’re properly insured.
How can contractors prepare for the IR35 reforms?
While it might seem as if the burden of IR35 is being taken away from contractors with the IR35 reforms, you still have work to do. Assuming you want to be declared outside IR35 by your end clients, you need to prepare in order to ensure a favourable outcome.
- Take a good look at your existing contracts and ensure they clearly flag that you are in business on your own account.
- Do the same for your working practices and ensure nothing there suggests that you are in any way an employee.
- If you find anything needs to change, discuss this with your client and/or recruiter, explaining that it’s beneficial to everyone concerned that you are clearly and legitimately outside IR35. Ultimately, this is about protecting yourselves against accusations of wrongdoing.
- Educate end clients and recruiters about the IR35 reforms and check they’re making preparations so they don’t end up making rushed decisions.
- Purchase appropriate IR35 insurance. You want a package that protects the whole contractor supply chain (you, your end client, your recruiter or agent) and flexes to cover whoever holds the tax liability. For now, this is you. Come April 2021, it will be your fee-payer in any given engagement. For this reason, it’s also worth considering IR35 insurance with access to IR35 status reviews that can independently assess your IR35 status and suggest any changes you may need to make.
Taking these steps should help ensure that you, your clients and anyone else in your supply chain are all well-prepared for the legislative reforms. All of the steps are important, but only taking out IR35 insurance will protect you and your clients from potential bankruptcy should you be unfortunate enough to lose an investigation – even if the chances do seem slim. It will also have the added benefit of removing a sense of risk from you personally, making you a more attractive prospect to clients, especially those more nervous about using PSCs as a result of the reforms.
The Kingsbridge Group has grown to become one of the UK’s leading providers of specialist insurance and IR35 services to the rapidly growing contingent workforce of contractors, freelancers and gig workers, through its Kingsbridge Contractor Insurance and Dinghy brands. It is also one of the leading providers of specialist brokerage services to corporate clients in the utility, recruitment and other industries through Kingsbridge Insurance Brokers.