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Since the announcement in 2018's Budget we have been actively speaking with our clients and contractor communities on the subject of IR35 reform. From face to face meeting, to phone calls and emails - IR35 has been a topic of focus, and one that has gartnered many myths, inaccuracies, miss reporting and questions. We've committed to educate people within our networks, producing various guide materials and sharing up-to-date insights as they're released.

We've been collecting questions presented to us in these conversations; with the aim to create the ultimate Private sector IR35 FAQ!  

Below you'll find our IR35 Q&A's... a list that is constantly growing as more issues are highlighted. If you have a question not answered below, contact ir35@caspianone.com and we'll investigate.




What are the definitions of‘inside’ and‘outside’ IR35?  
  • Inside IR35: when a person is classified as an employee of the end client rather than a freelancer, and as such, is subject to PAYE.
  • Outside IR35: When a person is classified as a genuine contractor, outside of the off-payroll working rules with the evidence available to support their status.
 
Who is responsible for determining inside/outside status? From April 2020 medium and large-sized companies (end clients or agencies) within the private sector will be responsible for deciding whether a person is operating inside or outside of IR35. If an inside status is applied, the company, agency or third party that is responsible for paying the individual’s limited company will also need to deduct income tax and employee NICs and pay employer NICs to HMRC.
 
How do I know if I’m inside or outside IR35?  
Three key factors help determine a person's IR35 status;
  • Control - The degree to which a client controls, directs and supervises what, how, when and where an individual completes the contract and day-to-day work.
  • Personal Service & Substitution - An employee offers a personal service, whereas a genuine business or contractor should be able to deliver services to a client regardless of who provides them.
  • Mutuality of Obligation - Whether ongoing work is expected by both worker and/or employer, or projects are completed on a one-off basis.
Understanding how you align with each of these factors will help you understand your IR35 status.
 
We’re a small company, will this reform affect us?   IR35 reform will impact medium and large-sized businesses only. The smallest 1.5m companies, as defined by the Companies Act 2006, will remain exempt from the changes in April 2020 (referenced in the HMRC Summary of Responses report).

HMRC - A small company is defined as one that does not have an annual turnover of more than £10.2 million, that has a balance sheet total not more than £5.1 million, and has less than 50 employees.
 
What happens if you disagree with your inside/outside classification?   The responsibilities, risks and penalties associated with IR35 status classification will sit with the end client (or agency) as-of April 2020. As such it is expected that a business takes ‘reasonable care’ when determining status… and managing disputes that may arise. 

HMRC will be providing support and guidance to those who will need to apply the off-payroll working rules (such as HR Directors or Hiring Managers), but ultimately, disagreements on status will remain between the individual and business’s HR department.

Evidence is key, so we recommend that contractors that wish to operate outside IR35 do all they can to preserve documents and similar items that would assist in proving status, should a dispute arise. Pay close attention to working arrangements and practices, referring back to our ‘Top 3 Factors’ article for guidance.

Contractors may also wish to obtain a ‘confirmation of arrangements’ document, signed by all parties, outlining full details of working arrangements - a key piece of evidence should an IR35 investigation occur.
 
For employers, what constitutes‘reasonable care’ when deciding IR35 status?   Little has been released concerning IR35 specifically… but for tax affairs in general, HMRC defines ‘reasonable care’ as - “Doing everything you can to make sure the tax returns and other documents you send to HMRC are accurate”.

HMRC will be looking for businesses to take a thorough and diligent approach, which most importantly, can be evidenced as-and-when required should an investigation occur. It will be vital for companies to be able to demonstrate the processes used to determine IR35 status, in proportion with the size of business.
 
Is IR35 legislation new?  
Off-payroll working rules have been active since 2000 in the public sector. In 2017 they were readdressed to overcome non-compliance, having reportedly now added an estimated £550 million of income tax and NIC’s to support UK public services. The Autumn Budget 2018 is when the expansion into the private sector was announced, due to take effect in April 2020. 
 
Is the CEST tool accurate? Taken from our interview with Seb Maley of Qdos Contractor - “It’s worrying that CEST has contributed to thousands of IR35 decisions. HMRC’s IR35 tool is considered unreliable, given it cannot assess the unique and quite specific aspects of a contractor’s working arrangement.”

“HMRC has regularly promised to improve the tool in the lead up to private sector reform, but that raises yet another issue. How can an answer the tool gave yesterday stand today if it is being changed on the fly?”
If I’m classified as being inside IR35, will I gain benefits associated with being an employee? While some businesses may choose to provide additional benefits, in the most part the answer will be no. Individuals, although classified as inside IR35 employees for tax purposes, do not receive benefits such as sick pay or holiday typical of being permanently employed. 

Should you work under an umbrella company, you would be entitled to some employment rights… but this will vary depending on the umbrella organisation you partner with. To clarify, an umbrella company is a standard UK limited company that acts as an ‘employer’ on behalf of a network of employed contractors. 
What help is available - what do I do next? HMRC has released and continues to develop support materials designed to assist both contractors and businesses, available on the gov.uk website. Also, we are collaborating with Qdos Contractor to provide insights on IR35 reform in the private sector - with new guides and releases available in the coming weeks. You can also speak to our team directly who can assist with your IR35 queries, or directly you appropriately.
How are Caspian One managing IR35 reforms? We believe that to overcome the impacts of IR35, businesses and contractors alike need to be educated on the subject… and provided with new, innovative ways to access technical capabilities as-well-as interesting, meaningful projects.

Over the coming months, we will be sharing a wide range of IR35 support materials and our consultants will be helping prepare people in our communities for April 2020. We’ve also developed ‘Caspian Partnered Capabilities’ - a unique service that protects clients from IR35 whilst also overcoming challenges associated with outcome-led projects.