IR35 in the private sector – contractor assessments hints and tips

Brian Rudkin

Brian Rudkin

Director and Head of Employer Services

On 6 April 2021, the IR35 tax changes come into force and a key component of these changes is the introduction of new statutory processes to follow for the end client (the person in receipt of the worker’s services).

This includes completing a formal assessment of each contractor’s tax status, formally documenting the outcome on a Status Determination Statement and delivering this statement to the contractor and the next party in the supply chain. The end client is also required to have a ‘status disagreement process’ in place should the contractor wish to appeal against the assessment decision.

The Government has made a big point about the need for end clients to take ’reasonable care’ in assessing whether the contractor is inside or outside the scope of IR35 and failure to do so will result in the end client being responsible for the deduction of tax, NICs and apprenticeship levy and paying these to HMRC.

HMRC’s guidance states that, “HMRC expects each client to make a correct and complete determination, and preserve sufficient records to show how the decision was reached”. So, clearly, getting this part right is arguably the most important task of the end client - and probably the most difficult considering conflicting and complex legislation, and case law on employment status. With this in mind, here are my five top tips to keep in mind for end clients beginning that journey.

1. Look beyond the contract

Whilst the written contractual terms governing the relationship with the contractor is the starting point in determining the tax status, it is not the end point. This is particularly important as the contract will effectively be ignored if it does not align with the way in which the contractor works for the end client.

The person, or team, doing the assessment really needs to get under the skin of the contractor’s relationship with the business. Understanding how the work and relationships look on a day-to-day basis will ensure that a robust assessment is undertaken. Subtle differences in how the work is performed, and the terms behind this, can have a significant impact on whether a contractor is inside or outside of IR35.

2. Focus on the key employment status indicators

HMRC lists 13 different factors within their guidance as relevant in deciding a worker’s tax status. Although these factors can contribute to building an overall picture of the tax position, the reality in most cases is that tax status is usually decided by 3 or four critical factors that far outweigh the others.

IR35 assessments should heavily focus on the following areas:

  • Mutuality of Obligation/ personal service
  • Control
  • Financial risk
  • Integration

3. Up to date tax knowledge is critical

Case law on employment status continues to evolve, setting important precedents for HMRC and taxpayers to follow in the context of IR35. Some of these precedents strengthen HMRC’s position that an employment exists, whereas others are pivotal in potentially demonstrating that a contractor is self-employed for tax purposes and therefore outside the scope of IR35.

Applying most recent case law precedents is essential to getting the IR35 assessments as correct as they can be, as is being up to date with relevant legislation and HMRC practice. HMRC’s view, as set out in their published manual, is that end clients are expected to have appropriate in-house tax knowledge, or to seek professional advice, to satisfy the ‘reasonable care’ test.

4. Use technology carefully

Technology undoubtedly has a part to play in helping an end client make accurate IR35 assessments. However, employment status is such a complex and subjective area of tax law it seems that the jury is still out as to whether technology can truly replace a human brain in weighing up all the relevant factors to arrive at an informed decision, which will vary and have different weighting from case to case.

HMRC’s much maligned Check for Employment Status for Tax (CEST) is fraught with risks for the end client. A public sector body was charged over £4m in liabilities and penalties for the incorrect use of CEST a couple of years ago, and HMRC itself has stood up in court recently and distanced itself from the CEST decisions in particular cases.

We also must bear in mind that the outputs from any technology solution is completely dependent on the quality and accuracy of the information going in. Does the user really understand the question? Is the correct answer being given?

5. Have clear processes and policies

There will be many ‘black and white’ assessments where a contractor is conclusively inside or outside of IR35. However, it is unusual for an end client not to have a few ambiguous situations where there are factors both supporting employment and self-employment for tax purposes.

This is where clear processes and policies are critical, to avoid the end client spending an inordinate amount of time dealing with individual cases and potentially ending up with inconsistent treatment across the contractor population. It can also help to reduce appeals being lodged by contractors who are not satisfied that the end client followed a fair and transparent process.

Is the board’s attitude to risk clear to us? Would it be prepared to accept an element of risk in assessing a contractor outside of IR35 when it is borderline? What is the process to follow when a contractor is borderline? Who signs this off and what documentation and audit trail is required to satisfy HMRC that “reasonable care” has been taken?

Get in touch

Johnston Carmichael has an experienced IR35 team who are supporting many businesses, from small companies through to multinational listed groups, across the whole spectrum of the supply chain in tackling the challenges posed by the new legislation. Please do not hesitate to get in touch with me if you would like to discuss your business’s IR35 position with our team.