IR35 for client managers

[GhostofTarbera]

Well remembered, it's here:

https://www.ipse.co.uk/uploads/asset...126da86ce1.pdf

EDIT: although on reading it, it's light on anything remotely useful and reads like scaremongering. I can see that leaflet encouraging all businesses to behave like HSBC

Exactly as I pointed out at the time


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[jamesbrown]

Client Co. are pushing the SDS decision to hiring managers with the expectation that they justify it. He's keen to do it right and has asked for help in doing so and interpreting the legislation, I'm not going to refuse given the chance to counter some of the HMRC FUD going around.

In that case, I'd focus on publicly available information about what the SDS is for, who writes it, what information it needs to contain, when it needs to be provided, what the consequences are if the SDS is wrong (edit: and what is meant by "reasonable care") etc. All the time noting that the legislation is still in draft. I'd still lean to filtering publicly available info rather than writing your own, but I commend you for making the effort and helping them.

[DaveB]

I’d quibble with you on the history w/r to Friday/Monday as that would’ve been easy to outlaw very precisely, had they wanted (it was just a sales pitch in a press release).

Substantively, though, you need to look at your discussion of the fee payer. The end client and fee payer are distinct and have separate legal responsibilities, according to the draft legislation. Ordinarily, the end client issues the SDS and the fee payer is liable when it’s wrong. If your client only engages directly, I’d clarify their situation as it relates to the overall situation.

You should also note that the legislation is in draft and clarify that the changes apply to medium and large clients only.

Your hiring manager really shouldn’t be asking you though. If I were you, I’d tell them that and point them to public sources of information.

Is the Fee Payer liable for an incorrect determination? They are liable for the deduction of taxes based on the decision but my understanding was that in the event of an "incorrect determination" the creator of the SDS becomes liable?

[jamesbrown]

Is the Fee Payer liable for an incorrect determination? They are liable for the deduction of taxes based on the decision but my understanding was that in the event of an "incorrect determination" the creator of the SDS becomes liable?

It's complicated, right?

Ultimately, the fee payer is responsible for the correct application of PAYE (deemed employment payments).

If the client who wrote the SDS failed to take "reasonable care", the liability falls back on them. If the client failed to provide an SDS within the statutory period, they assume the responsibility of the fee payer.

In the event of fraud, all bets are off.

[Snooky]

Good point on the feel payer / client distinction

What business did you say you're in?

[DaveB]

OK, based on feedback I've made some tweaks and changes.

IR35

What is it?
IR35 stands for Intermediaries Regulation 35. Introduced as part of the Finance Bill 2000, it was intended to have two effects:

• Firstly to prevent employers from dodging their NI obligations by making employees redundant on a Friday and re-engaging them on a Monday as “contractors”.

• Secondly to counter a perceived abuse of the Tax system by individuals operating as one-man-bands specifically in order to avoid tax under PAYE, something HMRC describes as “Disguised Employment”.

HMRC have an extremely poor track record in enforcing IR35 in the second scenario and have lost the vast majority of cases they have brought to Tax Tribunals.

How is it applied?
HMRC uses IR35 to challenge the employment status of individuals by testing their contracts and working arrangements against a hypothetical contract of employment. This contract is based on employment law and relies on 3 key factors.

• Supervision, Direction or Control,
• Mutuality of Obligation
• Right of Substitution.

These factors are all recognised in law as being essential to a contract of employment and have been tested repeatedly in the courts. While other circumstances may be considered (See other factors below) for a contract of employment to exist all three must be in effect.

1. There must be Supervision, Direction or Control (SDC)
For supervision to apply there must be someone overseeing another person doing the work to ensure that they are actually doing it and that the work is being done correctly to the required standard. Supervision can also involve aiding or assisting someone to develop their skills and knowledge.

Direction involves someone making another person do their work in a certain way, generally by providing instructions, guidance and advice as to how the work is to be done. Someone providing direction will often coordinate how the work is done as it is being undertaken.

Control is where you have someone dictating what work a person does and how they should go about doing that. This also includes the power to move the worker from task to task as priorities change.

2. There must be Mutuality of Obligation (MOO)
In simple terms, MOO means that in order for an employment relationship to exist, there must be an obligation on a work-provider to provide work and an obligation on the individual to carry out the work. For clients with freelancers working outside IR35 this means that if the client has no work for them to do, they are not obliged to find any nor pay them when work is not being done. For the Freelancer they are not obliged to accept any work from the client nor can they charge the client when work is not carried out.

3. There must be no Right of Substitution (ROS)
In the context of IR35 a right to substitute means a contractually enforceable right for a limited company contractor to replace its representative, at their own cost and subject only to reasonable criteria such as suitability. Provided the substitute is appropriately qualified and experienced the client should not be able to refuse the substitution.

What is changing?
In April 2020 HMRC are changing who is responsible for determining the IR35 status of freelancers providing services via Ltd Companies in the private sector. Up until now it has been the responsibility of the freelancer to make the determination and pay personal and corporate taxes appropriately. This typically involves paying for contracts to be professionally reviewed, documenting working arrangements and taking out insurance against HMRC investigations. Liability for Tax and NI arising from an incorrect decision rests with the Freelancers Ltd. Company. The fact that such insurance is readily available at reasonable cost is an indication of how likely HMRC are to be able to successfully bring a case at the Tax Tribunal.

In April 2020 the decision on status is being moved from the Freelancer to the end client of the Freelancers Ltd Company. The financial liability for an “incorrect decision” is also moving. This will also rest with the end client.

Clients will be expected to conduct an assessment and produce a Status Determination Statement (SDS). This will then be passed to the Freelancer, and to the next party in the contract chain, usually the Agency through which the freelancer is engaged, but not always. The SDS should then be passed on down the contract chain to the last party in that chain, also known as the Fee Payer. They are now responsible for the deduction of tax based on the SDS before payment is made to the Freelancer.

In the event of an “incorrect determination” the liability for any unpaid tax reverts to the End Client who produced the SDS.

Correctness or otherwise of the decision in the SDS would be determined by HMRC in the event of an investigation.

Clients are not permitted to conduct blanket assessments of status. Each engagement must be decided on its own merits and Clients must provide an appeals mechanism for Freelancers unhappy with the decision.

It is important to note that none of the underlying employment law or existing case law around IR35 is changing. Freelancers properly operating outside of IR35 before this change will still be outside afterwards.

Other Factors
While SDC, RoS and MOO are the key factors involved, other circumstances may clarify the situation in cases of doubt. These include:

Use of Equipment
While the provision of certain vital client equipment is a given e.g Laptops for access to secure client systems, using client mobile phones or cars suggests that a working arrangement is perhaps more suited to that of an employee.

Business Presence
For a contractor’s working arrangement to fall outside IR35, it’s important they operate just like any other business. And this includes having a business presence. Insurance, a company website, letterheads, business cards, a registered office address, legal structure and VAT registration could indicate to HMRC that a contractor is genuinely self-employed, and not working through a PSC simply to avoid paying employee taxes.

Number of Clients
Working on a number of different contracts at the same time indicates that a contractor is less likely to be working in an employee-like arrangement, and therefore outside IR35.

Client Integration
Ambiguous as it might be, the level at which contractors integrate with clients can be an indication of their IR35 status. From how employees in the organisation perceive the working arrangement, to making use of the employee car-park or attending office parties, to sit outside IR35, differences between the contractor and the employee must exist.

Payment
When a contractor is paid by the hour, day or week, this might suggest that the working arrangement has similarities to employment, compared to say a fixed project fee, which is an obvious indicator of self-employment.

[ladymuck]

It's good, makes sense to me

[jamesbrown]

I would say “could” revert to the end client. The main thing for your hiring manager to understand is that they must take “reasonable care” with the SDS and they must provide one in time.

[malvolio]

Just to be really picky "IR35" is just a nickname, and was the paragraph in the press release from the 1999 budget that announced what is properly called the Intermediaries Legislation, which is currently defined in Chapter 8 of ITEPA 2003. The new changes will be in Chapter 10 ITEPA, which is where the current PS rules are listed, so strictly speaking are separate to IR35 itself. You really should include the reference somewhere, if only to prove you've read it!

But otherwise, good work and good luck.

[LondonManc]

"Use of Equipment

While the provision of certain vital client equipment is a given, using client laptops, mobile phones and cars, suggests that a working arrangement is perhaps more suited to that of an employee."

Suggested extra sentence:

However, if a contractor must use a client's computer to access their network and own equipment use is prohibited as part of a client's risk policy, this is not seen as an IR35 issue.

Rationale:

Clients could panic and jump to the 1+1=3 conclusion that they can't let contractors be outside IR35 if they don't use their own equipment. It's IR35 neutral as it's often part of the Ts & Cs of working for a large client on site.