Need advice on IR35

[humucagir]

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[jamesbrown]

You don't need to be an employee in any formal sense to set up a PAYE direct scheme such as DPNI, it's simply intended for situations where there is no UK-based employer. That said, there aren't really clear advantages over self-employment (where IR35 is equally irrelevant). You avoid ErNI, but you have EeNI. In both cases, you are exposing yourself personally to commercial risk, subject to whatever your contract says and I would never do that with a North American client.

Regarding "reopening the company after 5 years". To what end? There is no realistic way to transfer liability to you, personally (well, absent fraud or gross incompetence w/r to assessing liability). Chapter 8 is very much unlike Chapter 9 in that regard.

[soyoh30298]

There is no realistic way to transfer liability to you, personally

Well in OP case for deliberate behaviour it should very easy, I even think HMRC will enjoy doing this. First time in history for Regulation 72 in an IR35 case, that'll be a huge warning for everyone.
Maybe he has a case that acted in "good faith" given the inside SDS, but from what I see that's hopeless. Personally I would ring HMRC and go with an unmprompted disclosure to get a reduced penalty.

( Ok, I'm not that paranoid, obviously don't ring HMRC OP, they'll laugh their ass off )

[jamesbrown]

Well in OP case for deliberate behaviour it should very easy, I even think HMRC will enjoy doing this. First time in history for Regulation 72 in an IR35 case, that'll be a huge warning for everyone.
Maybe he has a case that acted in "good faith" given the inside SDS, but from what I see that's hopeless. Personally I would ring HMRC and go with an unmprompted disclosure to get a reduced penalty.

( Ok, I'm not that paranoid, obviously don't ring HMRC OP, they'll laugh their ass off )

I agree that, if there were ever to be a case of liability transferred under Reg 72, it would be for the situation where a professional review had been undertaken and found the contract to be inside, and that review ignored. Given reasonable care and due diligence, there's essentially no chance that Reg 72 could be used.

[soyoh30298]

I agree that, if there were ever to be a case of liability transferred under Reg 72, it would be for the situation where a professional review had been undertaken and found the contract to be inside, and that review ignored. Given reasonable care and due diligence, there's essentially no chance that Reg 72 could be used.

There's certainly a degree of speculation here tbh. The professional reviews usually state that "they're not liable for their opinion". And CEST tool says that HMRC will hold by result. A reasonable person in "good faith" will assume that CEST would take precedence and a professional "opinion" should be taken in consideration but not reliant upon. Given there's a paper trail why it was disregarded, some Saul Goodman lawyer could spin up a story of careleness I suppose. But since that never happened in practice, I'm curious how it will turn out. In OP case I would disagree that stock options could indicate employment. Although it does create a degree of involvement in the company ( since the price of shares depend on how good the company is performing ). It could easily be argued that it's a financial agreement ( poor startup, no money, in US is very common ). Especially if they're NSO ( which have no tax wrappers ). IMHO it's a minor point.

Also, interesting point. Many replied that substitution is a sham. I would agree, but. Assuming OP contract is under US law, they have a duty of good faith, which is a strong indication that the right is genuine as written.
I don't think there was ever a tribunal case for US client, but ( NLA ) from what I read about US law, a hypothetical contract would be way harder to establish since US is way more strict with the written agreements

[jamesbrown]

There's a pretty high bar for applying Reg 72. Although old, there's a good discussion here:

https://www.whitefieldtax.co.uk/ir35...-a-individual/

I don't think US jurisdiction and governing law makes any difference w/r to establishing a hypothetical contract, since it's merely a legal device in IR35 case law to determine what the relationship would look like if the individual were working directly for the end client. The written terms of the contract will be deprecated in favour of evidence based on working practices and a UK tribunal will not debate the laws of another jurisdiction, rather focus on the legislation and case law that underpins our common law system.

[soyoh30298]

I don't think US jurisdiction and governing law makes any difference w/r to establishing a hypothetical contract

Ah I would love a lawyer's opinion .
I think it should, on the basis that the judge want to establish the real relationship between the contractor and the client.

HMRC: You're an employee. If you were working directly for the client, your working practices won't change.
Contractor: Nope, I'm not, I have a RoS and there's no D&C, which is not compatible with personal services.
HMRC: RoS is a sham, and the contract is on purpose made IR35 friendly.
Contractor: Beg to differ, the contract is under US law, which implies duty of good faith from the parties, thus the written arrangement carry considerable weight and cannot be easily ignored in practice. Also, a US party wouldn't care about IR35 since it's not their jurisdiction. Why would they on purpose shoot themselves in the foot and be open to litigation by adding contract clauses that they won't adhere to in duty of good faith?

i.e. what I think is, that if HMRC tries to build a "hypothetical" case on why the contract is a sham, they cannot disregard the real intention of the parties which is written in the contract.
Suppose the contract is under a jurisdiction of a hypothetical country where if you breach term X then by law you have to pay $10k to the other party. Would X be considered a sham? I don't think so, because looking at the full picture we have to consider that X bears way more weight and is far more genuine than if it was a clause under English law.

[jamesbrown]

Ah I would love a lawyer's opinion .
I think it should, on the basis that the judge want to establish the real relationship between the contractor and the client.

HMRC: You're an employee. If you were working directly for the client, your working practices won't change.
Contractor: Nope, I'm not, I have a RoS and there's no D&C, which is not compatible with personal services.
HMRC: RoS is a sham, and the contract is on purpose made IR35 friendly.
Contractor: Beg to differ, the contract is under US law, which implies duty of good faith from the parties, thus the written arrangement carry considerable weight and cannot be easily ignored in practice. Also, a US party wouldn't care about IR35 since it's not their jurisdiction. Why would they on purpose shoot themselves in the foot and be open to litigation by adding contract clauses that they won't adhere to in duty of good faith?

i.e. what I think is, that if HMRC tries to build a "hypothetical" case on why the contract is a sham, they cannot disregard the real intention of the parties which is written in the contract.
Suppose the contract is under a jurisdiction of a hypothetical country where if you breach term X then by law you have to pay $10k to the other party. Would X be considered a sham? I don't think so, because looking at the full picture we have to consider that X bears way more weight and is far more genuine than if it was a clause under English law.

I have no idea what you mean by "US law". Contracts with US clients (and I know this because I mainly work with US clients) are always written against the jurisdiction and governing law of a particular US state and laws vary widely between states. There are federal laws surrounding contracts in some, narrow areas. It's true that a principle of "good faith" is codified into a lot of legal systems and it's not absent from our common law system, just not codified in a general way (i.e., it is context dependent). There isn't the slightest chance that an IR35 tax tribunal would attempt to add or remove weight from the actual contract when building the hypothetical one on the basis of an interpretation of the laws in a given jurisdiction. They will take the contract at face value and seek to determine whether the working practices match it and how they colour it. HMRC (and tax tribunals) don't care about commercial arrangements in that sense, they care about whether the relationship smells like one of employment, given a hypothetical contract between the two parties, directly.

[humucagir]

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[jamesbrown]

But I can't be a sole trader can I? Employment status still applies. So I have to go DPNI. Alternative, tell my accountant to go now Inside IR35 and they go and report me to HMRC since why it was outside before ( or HMRC will notice ).

Employment status and PAYE arrangements are two separate things. The DPNI scheme is merely a scheme to allow for you to manage PAYE yourself when there is no UK-based employer. It doesn't imply anything about employment status for employment law or tax purposes.

As to whether you can be a sole trader, I have no idea. In principle, you certainly can. Should you? I don't know. Is your client happy? I don't know. As I said, I would not consider it with a US client. You are correct that false self-employment is still an issue, in principle, when operating as a sole trader, but the liability is different.

All that said, the difference in tax comes down to ErNI. There is none if you're a sole trader or on a DPNI scheme. Obviously, through an umbrella, there is, plus the AL, because the umbrella is your UK employer.

As an aside, I see very little (quantifiable) difference in IR35 risk either way (in relation to moving from outside IR35 to something else). No one knows how HMRC profile individuals and there is a chance of random selection anyway. Your historical status is already at risk and nothing will change that.