Article | 06 Apr 2022

IR35 Reforms - Key learnings & The Impact on Gig Economy

Posted in Freelancer, Industry news, Learning, Client,

After the success of The Work Crowd’s 2021 IR35 event, we hosted a ‘one year on’ webinar to review the impact of these changes on the gig economy, explore key learnings for both freelancers and clients, and review the latest news surrounding the reforms.

Sean Mackenzie, Senior Business Development Manager for Parasol Group and IR35 whizz returned to give a refresher on IR35 and what we can expect moving forward.

IR35 tax legislation has been impacting contract workers in the public sector since 2017, and in 2021 it was brought into the private sector. The biggest fundamental change to IR35 last year was for contractors working for medium to large sized businesses who no longer have the option to determine whether they are in or outside of IR35 – that decision is now made by the end client.

What are the main factors that determine IR35 status?

  • Personal service/substitution This allows contractors to bring in a substitute if they aren’t able to carry out the agreed scope of work. A substitution clause in a contract will demonstrate that the contractor is working for their own business and will help to position them outside of IR35. Right of substitution is rarely used or reflected in day-to-day working but if it’s included in a contract with the client’s consent then it can contribute to building the case for a contractor being outside of IR35.
  • Mutuality of obligation highlights that the contractor is not obligated to do any additional work for the end client that they are working with. One recent change around this is in the obligations of terminations - as a result of this, contractors who sit outside of IR35 may notice that there is no notice period in their contracts anymore.
  • Control is one of the most compelling ways in which contractors can demonstrate that they’re outside of IR35 through their working practices. Questions around control include HOW the work is being done – does the contractor have complete control over the agreed piece of work? WHERE the work is being carried out – remote working allows contractors to have more control over where and WHEN they’re working. WHAT the type of role is – is it a project or a very specific brief with no room for deviation. This is a big grey area but a strong one for demonstrating that a contractor should sit outside of IR35.
  • Other factors include how the client treats the contractor and how they behave in the workplace. There should be an end date to all contracts and contractors shouldn’t be included in org charts or on company email addresses if they want to sit outside of IR35. If you are on company emails or org charts it should be clearly stated that you are outside of the business. Contractors generally also need to own their own business account and have their own business insurances. Using your own equipment can also help in positioning you outside of IR35.

What we have seen coming out in case law recently is that you don’t need all 3 pillars of the following factors to position you outside IR35. End clients are much more risk averse, however, as they don’t want to risk fines or negative PR.

Could a substitution clause be enforced and what would the impact of that be?

If the substitution clause is included in a contract it does have to be with the understanding that a client will allow that. It’s very rare that a substitution is actually used – so long as it is requested in the correct way there shouldn’t be a reason for a client to decline that. Educating clients about what the clause means is key.

Does having a portfolio of clients help to position you outside of IR35?

IR35 is determined on an assignment by assignment basis – each individual client must assess the contractor on the work that they are carrying out for them. Having several clients helps contractors to be in control of the work that they’re doing but it doesn’t change the fact that each end client has to determine their status separately.

How does HMRC determine your IR35 status?

HMRC is generally looking in two places to determine your IR35 status. Contractual agreements – great if you have an IR35 friendly contract, but it needs to be backed up with working practices - this can even be down to attendance at staff parties or taking advantage of free staff canteens.

What were the key changes to IR35 legislation in 2021?

  • The biggest fundamental change to IR35 last year was for contractors working for medium to large sized businesses who no longer have the option to determine whether they are in or outside of IR35 – that decision is now made by the end client.
  • Small companies’ exemption – contractors can still choose their own determination when working within small companies where the hirer is a private sector business, however, this is rumoured to be subject to change in the coming months.
  • Fee payer responsibility – this now lies with the end client or the recruitment company or agency paying the contractor’s fee. If contractors now have a role working for a medium to large sized company which deems them outside of IR35, the hiring company is responsible for the determination (and fines if the determination is deemed to be wrong by HMRC).
  • The Status Determination Statement (SDS) must be produced by the end hirer and provided to the contractor. This will include the IR35 status of the engagement and the reason behind that decision.
  • The statutory client-led disagreement process facilitates the process for challenging an IR35 decision with the end hirer who has made the SDS. Following a challenge, the end client must respond within 45 days either outlining the reasons behind their decision or offering a revised SDS.

If a client isn’t giving a contractor the appropriate SDS paperwork, does that have any effect on where the responsibility lies?

The end client has to show that they have taken ‘reasonable care’ in their IR35 assessments, but this is very open to interpretation. End clients have to provide contractors with an SDS – if you don’t receive anything you should ask for the SDS and what tools and processes the client has used to reach their assessment. If a client has put you inside of IR35, they’re only going to agree to certain payment structures like PAYE which don’t allow you to work through your limited company.

What is the process if you do want to challenge a determination?

HMRC is not involved in the process – the end client simply has to explain their determination as part of their reasonable care if challenged. If the end client can show that they have used, for example, the CEST tool to deem a contractor inside IR35 there’s not a lot else that can be done beyond that at the moment.

How strict are HMRC being about the new rules?

The ’soft landing’ which gave businesses a grace period to implement the new IR35 processes will come to an end in April 2022 and following that we expect to see a greater number of cases going through HMRC investigations -  this will initially be with larger end clients.

Are contractors working with small companies being audited at this point in time?

Small companies were kept out of the recent reform in IR35 regulations, so it is up to the contractors to determine if they are inside or outside of IR35. Consider the four pillars to determine your status - as a contractor working with multiple clients it is easier to show that you’re outside of IR35 in that you are choosing the work that you do with a range of different clients. At the moment HMRC is generally looking at bigger end clients.

How are end clients reacting to the change in IR35?

Role-based assessments are becoming business as usual for many larger companies, and this means that they’re using a blanket approach to determine the IR35 status for roles regardless of who the individual contractor is.

End clients are also starting to use contractors from outside of the UK where IR35 rules don’t exist, while UK-based contract workers are starting to look at roles outside of the UK where they can make their own determination.

If an end client is looking to work with a contractor outside of the UK, how does that work with IR35?

If the contractor is outside of the UK it is down to the tax legislation in the country within which they are working. There are lots of rules similar to IR35 within European countries but outside of Europe there is less regulation.

The advantage of now being able to work remotely is that contractors can consider working for clients based outside of the UK – and the determination will then lie with the contractor.

What are my options as a contractor going forward?

  • Outside of IR35 you are deemed as a true contractor meaning you can work through your limited company, as a sole trader, or there are also a number of hybrid options too. Speak to your accountant for the model that will work for both.
  • Inside IR35 you’re deemed as an employee and your options are Agency PAYE, Umbrella or Deemed Payment (where you work through your limited company but your tax is deducted before it is paid to you)
  • Consider having two separate rates to reflect contracts that fall inside or outside of IR35. An uplift of rate for contractors working inside IR35 is advisable whereas an outside IR35 rate would be the contractor’s ‘normal rate’.

Where should contractors be positioning their rates when thinking about being inside or outside of IR35?

Your outside rate would be the rate that you’ve always worked from prior to the introduction of IR35. For an inside IR35 rate you’re looking at an uplift of about 25%. This is to mitigate Employer National Insurance, the apprenticeship levy and holiday pay. Within the market we’ve seen a very mixed process – some have been open to uplifting in order to keep their contractors whereas others are reluctant.

Keen to watch this webinar back? Click here to watch the full webinar.