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IR35 Employment Status

Why is it in the news?

Since its introduction in 1999, IR35 legislation has continued to cause both confusion and ongoing issues for freelancers, contractors and businesses who hire this type of personnel. The rules are designed to bring the “false self-employed” within PAYE as “deemed” employees (“inside IR35”).

Contractors who work through their own limited company or Personal Service Company (PSC) are able to benefit from greater tax flexibility however they do not receive employee benefits such as holiday entitlement, sick pay or any other rights or perks.

If a contractor is found to be within the scope of IR35 then HMRC sees them as a deemed employee who should pay income tax and National Insurance on the payments received. HMRC considers that a large majority of PSCs are not operating IR35 correctly. They do not have the resources to enquire into every contract and instead new legislation was brought in for “off-payroll” workers. This started in April 2017 for workers engaged via a PSC in the public sector.

From April 2020 these IR35 off-payroll rules will be expanded to the private sector. This will initially only affect larger incorporated businesses that meet two out of three set criteria as well as contractors or agencies working with businesses that meet them. The criteria are:

• Turnover of £10.2m and above;
• Balance sheet of £5.1m and above;
• 50 or more employees.

Unincorporated businesses are caught if they exceed the turnover test only.

This will affect contractors, businesses and agencies involved with these contracts. Interpretation of the IR35 rules is very complex with Tax Tribunal decisions turning either way depending on the facts. HMRC is due to update its IR35 decision making tool, CEST, but use of that tool does not guarantee safety within the rules.

Don’t forget non-PSC self-employed freelancers

With all the emphasis in the news on IR35, businesses should not overlook workers engaged directly without the use of an intermediary company. HMRC continues to review these engagements and any re-categorisation of an employee could be very expensive to the engaging business. This includes ‘gig economy’ workers on freelance or temporary contracts. Re-categorisation could also result in employment rights claims from the workers for holiday pay etc.

The Enquiry Process

If HMRC suspect workers are inside the scope of IR35, in the first instance, they will send a letter which will begin the enquiry. They are allowed to request information and documentation to use as evidence.

When a letter is received from HMRC it is advised that specialist help is sought as soon as possible to ensure a confident defence. A full investigation could be prevented at this stage with sufficient evidence. Although contractors are likely to be aware of the rules and what is considered to be ‘outside’ IR35, they may not be able to resolve the enquiry as quickly as a specialist or be prepared for what a full investigation would entail.

If the evidence gathered for the response to HMRC is not sufficient they will want to speak to the hirer. If possible, it would be advised that the contractor and specialist meet with the hirer to discuss the next steps in the enquiry and what they should expect from HMRC.

Once the review of evidence has been completed, the outcome is determined by HMRC as to whether or not the contractor falls inside or outside IR35 rules. If found to be inside, an assessment will be raised for income tax and NI charges they believe should have been paid. If the inspector believes this to be deliberate avoidance a further penalty could be charged. If HMRC look back six, or more, years then the HMRC claim could be substantial. Appeals could progress to the Tax Tribunal.

A specialist will be able to assist in the navigation of this process and again taking on the more difficult aspects of the dispute. It would not have a detrimental effect on the case and could make it possible to avoid a tribunal all together.

If taken to a tribunal, both sides would be expected to present evidence and could introduce witnesses to support their arguments. It could be months before a ruling is given and either side can appeal the ruling which would end up in a repetition of the process in the upper tax tribunal or a higher court.

How can Qubic help?

Our Tax Investigations & Employment Tax Director, Dave Jennings, is a Chartered Tax Adviser and ex-HMRC Tax Inspector with over 30 years’ experience in the area of tax investigations, PAYE and NIC.

Having worked on numerous cases throughout his career ,with both HMRC and as an adviser, Mr Jennings is experienced in navigating IR35 investigations, even the most complex, and has been through Tax Tribunals and Courts. He has advised end engagement clients, Managed Service Companies (MSC), agencies, employment umbrellas and contractors. His knowledge of the legislation enables him to liaise concisely and efficiently with HMRC.

Our Tax Disputes & Dispute Resolutions team work with clients and their advisers nationally to negotiate the best solution to fit the client’s personal circumstances.

Please feel free to give us a call on 0191 2322001 should you wish to discuss matters in further detail or any possible client scenarios.

Posted: 19th Nov 2019

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