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Be careful if you take Outside IR35 contracts

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    Be careful if you take Outside IR35 contracts



    Now I know this may sound like Chicken Little / Chicken Licken claiming the Sky is Falling but I’ve had years of experience from moderating the HMRC Enquiries forum which tells me not to trust anyone’s reassurance (be it an IR35 expert or HMRC) when money is involved.

    Awareness, not guidance

    Make sure that any contract you are about to take is definitely outside, and not just something the agency has advertised to get contractors to take it.

    Here are some tips for ensuring that your contract is definitely outside IR35:

    Top 10 tips to make your contract outside IR35 (contractoruk.com)

    Background

    There are two types of Outside contracts.

    The old style IR35 contracts where you are responsible for assessing IR35 status still exist. The typical situation for this type of contract is when the client is a small company (explained in Chapter 8 of ITEPA):

    Chapter 8 - Income Tax (Earnings and Pensions) Act 2003 (legislation.gov.uk)

    A small company is defined as having:

    Annual net turnover of less than £10.2 million
    Balance sheet totalling less than £5.1 million
    Less than 50 employees

    A small company is not liable for any unpaid tax and the determination remains with the contractor rather than the client. In this case, there is no Status Determination Statement from the end client.

    [Note – HMRC wants to remove the small company exemption unless MPs can stop it.]

    The other, less common, situation where the old style IR35 applies is when the end client is overseas and they have no “UK connection”, such as a UK permanent establishment (e.g., a branch office). As with the small company exemption, a fully overseas end client is not liable for any unpaid tax and the IR35 determination remains with the contractor.

    And the new post April 2021 version where the client does not fall into the small company category (explained in Chapter 10 of the ITEPA)

    Chapter 10 - Income Tax (Earnings and Pensions) Act 2003 (legislation.gov.uk)

    Other companies ARE liable for any unpaid tax and the determination moves to them.

    Why this post?

    Because with Chapter 10 determinations the contractor isn’t responsible for the determination, instead the end client is.

    But the end client isn’t responsible for the tax bill that the determination may result in, which opens up various means by which someone else (potentially you, the contractor) will be left paying the bill.

    If / when an outside determination is challenged by HMRC (and HMRC wins), it is not the end client who is responsible to pay the tax due but the “Fee Payer” in the first instance. Typically, that “Fee Payer” is the agency who paid your limited company and they are not going to be in a position to pay what is likely to be a very large tax bill. Which means that the “Fee Payer” will in most cases be looking for someone else to pay the bill and could be advised by HMRC to claw-back the tax from the contractor. This could happen months later (or potentially years later as HMRC gets around to the case). Where the contract between your company and the Fee Payer includes claw-back clauses (that pass liability for unpaid taxes down to your company or even you personally), the risk increases.

    This is because HMRC has told a long-term poster (posing as a “Fee Payer” agency) on multiple occasions that were this to occur their advice would be to claw-back the money from the contractor.

    And this means…?

    Because I have been moderating the HMRC Scheme Enquiries forum for years, I can see the way the wind is blowing for this.

    Individual retrospective* tax collection is only a matter of time, in my view.

    (*HMRC will say that it isn’t retrospective because they made the IR35 changes in 2021 – anything before this time isn't included – of course it IS retrospective for those individuals caught in specific contracts.)

    So what do you advise?

    I am not advising anything. I am not an accountant. I have posted this to make sure that you are aware of what might be coming down the track.

    Personally, I will only be taking outside IR35 contracts from small companies, and I will be keeping that decision under review.

    It is for you and your own circumstances to decide what to do next, but I repeat:

    Make sure that any contract you are about to take is definitely outside, and not just something the agency has advertised to get contractors to take it.

    An IR35 warning to businesses: As HMRC’s ‘grace period’

    comes to a close, IR35 assessments become more complex than ever - Lexology

    IR35: NAO off-payroll report ‘shows extending rules to small companies would be madness’ (contractoruk.com)

    Tax - Inside or Outside - Contractor UK Bulletin Board

    https://forums.contractoruk.com/accounting-legal/145667-inside-outside-tax-turning-into-another-loan-charge-debacle.html


    https://www.contractoruk.com/news/00...e_madness.html

    (Thanks to eek and jamesbrown for reviewing and improving.)
    "I can put any old tat in my sig, put quotes around it and attribute to someone of whom I've heard, to make it sound true."
    - Voltaire/Benjamin Franklin/Anne Frank...

    #2
    Oh and how to check that your chapter 10 outside IR35 is really outside

    1) You have an SDS determination that says its outside.
    2) the people (management / project management) you are working with at the end client know about the determination and that it's outside.

    merely at clientco for the entertainment

    Comment


      #3
      I've got a proper SDS from the QDOS assessment I did, but I think people (as ever, on here) are being totally paranoid about this.

      Some seem to think that HMRC have extensive knowledge of contractors' accounts, and their sophisticated systems will be harvesting teraflops worth of data trying to catch one-man band IT geeks out.

      When the public sector reforms came in in April 2021, many on here were almost rubbing their hands in glee at the 1000s upon 1000s of permietractors rolling over and going Inside doing the exact same role as HMRC would no doubt come knocking. This hasn't happened, people are still in these roles, and many have closed their companies which is surely the biggest sign of disguised employment going?!

      Truth is, chances of anyone being affected by this new guidance is slim to none.

      Obviously, I know it does happen but I think people need to calm down and stop using this as yet another way in which HMRC are out to get poor old contractors

      Comment


        #4
        Great post just one part I am unsure of though

        (*HMRC will say that it isn’t retrospective because they made the IR35 changes in 2021 – anything before this time isn't included – of course it IS retrospective for those individuals caught in specific contracts.)

        so will contracts before 2021 be (or could be) investigated or not?

        Comment


          #5
          Originally posted by GregRickshaw View Post
          Great post just one part I am unsure of though

          (*HMRC will say that it isn’t retrospective because they made the IR35 changes in 2021 – anything before this time isn't included – of course it IS retrospective for those individuals caught in specific contracts.)

          so will contracts before 2021 be (or could be) investigated or not?
          It's the private sector changes (post April 2021) that are of concern here.

          Basically the issue is - HMRC come calling to end client about some dubious "outside IR35" contracts. The end client caves and the Fee Payer (your agency) is asked to find £20,000 or more to pay the taxed owed.

          And the question then becomes - will the agency pay that £20,000 or will they try to find someone else to pay the bill.
          merely at clientco for the entertainment

          Comment


            #6
            Originally posted by ensignia View Post

            Truth is, chances of anyone being affected by this new guidance is slim to none.

            Obviously, I know it does happen but I think people need to calm down and stop using this as yet another way in which HMRC are out to get poor old contractors
            You’ve read it and you disagree. Great!

            That’s the reason I’ve posted this. Better that than a potential unpleasant surprise further down the lane.
            "I can put any old tat in my sig, put quotes around it and attribute to someone of whom I've heard, to make it sound true."
            - Voltaire/Benjamin Franklin/Anne Frank...

            Comment


              #7
              Originally posted by cojak View Post

              You’ve read it and you disagree. Great!

              That’s the reason I’ve posted this. Better that than a potential unpleasant surprise further down the lane.
              I don't think ensignia has ever dealt with a large company.

              The repayment terms are literally designed to allow HMRC to apply pressure, knowing that the end client will cave in rather than fight because

              1) the end client won't want the risk of bad publicity (regarding not paying tax / workers correctly) with the cost of paying the legal fees
              2) the end client isn't the one who will be paying the bill.
              merely at clientco for the entertainment

              Comment


                #8
                Originally posted by eek View Post

                It's the private sector changes (post April 2021) that are of concern here.

                Basically the issue is - HMRC come calling to end client about some dubious "outside IR35" contracts. The end client caves and the Fee Payer (your agency) is asked to find £20,000 or more to pay the taxed owed.

                And the question then becomes - will the agency pay that £20,000 or will they try to find someone else to pay the bill.
                And who does the agency then ask for the money? Do they ask Bloggs Co Ltd or Fred Bloggs?
                Public Service Posting by the BBC - Bloggs Bulls**t Corp.
                Officially CUK certified - Thick as f**k.

                Comment


                  #9
                  Originally posted by Fred Bloggs View Post

                  And who does the agency then ask for the money? Do they ask Bloggs Co Ltd or Fred Bloggs?
                  Depends on the approach they use..

                  legally they could request the money be repaid by Bloggs Co Ltd - as that's the legal entity the agency has the agreement with.

                  However it's possible the agency could pay some of the NI / tax via PAYE and get HMRC to collect the rest from you personally.
                  Last edited by eek; 21 February 2022, 14:14.
                  merely at clientco for the entertainment

                  Comment


                    #10
                    Originally posted by eek View Post

                    Depends on the approach they use..

                    legally they could request the money be repaid by Bloggs Co Ltd - as that's the legal entity the agency has the agreement with.

                    However it's possible the agency could pay some of the NI / tax via PAYE and get HMRC to collect the rest from you personally.
                    There's several barriers that are extremely easy to erect to prevent either of those happening.
                    Public Service Posting by the BBC - Bloggs Bulls**t Corp.
                    Officially CUK certified - Thick as f**k.

                    Comment

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