BROOKSON.CO.UK IR35 GUIDE A GUIDE TO IR35 BROOKSONONE.CO.UK

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1 BROOKSON.CO.UK A GUIDE TO IR35 1

2 CONTENTS UNDERSTANDING IR35 AND ITS IMPLICATIONS DISTINCTION BETWEEN PUBLIC AND PRIVATE SECTOR CLIENTS TOP 10 TIPS IR35 FAQ S

3 UNDERSTANDING IR35 AND ITS IMPLICATIONS As a contractor your IR35 status effectively determines your tax position with HMRC. Contractors working through a Limited Company, who fall outside IR35, are entitled to receive payment in the form of dividends. Those who fall inside IR35 are regarded as disguised employees for tax purposes and are only entitled to receive payment on a PAYE basis. WHAT IR35 IS DESIGNED TO ACHIEVE? IR35, or Intermediaries Legislation, sets out the law relating to the tax treatment of individuals who work through an intermediary such as a Personal Service Company. To quote HMRC: The aim of the legislation is to eliminate the avoidance of tax and National Insurance Contributions (NICs) through the use of intermediaries, such as Personal Service Companies or Partnerships, in circumstances where an individual worker would otherwise: For tax purposes, be regarded as an employee of the client For NICs purposes, be regarded as employed in employed earner s employment by the client. Prior to the introduction of the legislation an individual could avoid: Being taxed as an employee on payments for services; and Paying Class 1 NIC by providing those services through an intermediary. The worker could take the money out of the intermediary, normally a Personal Service Company (Limited Company), in the form of dividends instead of a salary, resulting in significant tax savings. The legislation ensures that, if the relationship between the worker and the client would have been one of employment had it not been for an intermediary, the worker pays tax and NICs on a basis broadly equal to that an employee of the client would pay. The legislation does not render a worker who is caught by IR35 entitled to employment rights (such as unfair dismissal and redundancy). IR35 only affects a worker s tax status. GET IN TOUCH SPEAK TO A MEMBER OF THE TEAM ON

4 HMRC DEFINITIONS OF EMPLOYED AND SELF-EMPLOYED Determining whether a person works under a contract OF service (employment) or FOR services (self-employed, independent contractor) is key when it comes to applying the tax benefits of self-employment. The fact is that for tax and NICs purposes there is no statutory definition of either type of contract. What the parties call their relationship, or what they consider it to be, is not conclusive. It is the reality of the relationship that matters. In order to determine the nature of a contract it is necessary to apply the relevant factors and tests the courts have, over the years, laid down. These have led to a series of questions that provide a general guide as to whether a worker is an employee or self-employed. If the majority of answers to the following questions is Yes, the more likely an individual is to fall inside IR35 and therefore a disguised employee of the end client: Do they have to do the work themselves? Do they have to work a set amount of hours? Can someone move them from task to task? Are they paid by the hour, week, or month? Can they get overtime pay or bonus payment? Can someone tell them at any time what to do, where to carry out the work or when and how to do the work? GET IN TOUCH SPEAK TO A MEMBER OF THE TEAM ON

5 If the majority of answers to the following questions is Yes, the more likely an individual is to fall outside IR35 and be genuinely self-employed: Can they hire someone to do the work or engage helpers at their own expense? Do they risk their own money? Do they provide the main items of equipment they need to do their job, not just the small tools that many employees provide for themselves? Can they decide what work to do, how and when to do the work and where to provide the services? Do they agree to do a job for a fixed price regardless of how long the job may take? Do they regularly work for a number of different people? Do they have to correct unsatisfactory work in their own time and at their own expense? The best way to deal with IR35 is not to be in a position where you have to prove you are not a disguised employee but to ensure your practices are in line with the criteria for being self-employed. Ultimately whether you fall inside IR35 on a particular assignment is determined by the specific facts of each situation and each assignment you undertake will be considered on its own merits based on all of the relevant case law precedents. GET IN TOUCH SPEAK TO A MEMBER OF THE TEAM ON

6 BROOKSON S APPROACH Employment status is a complex assessment requiring professional, specialist knowledge and experience to undertake reliably. Brookson offer a review of each new assignment contract and working practices, as well as conducting reassessments of existing assignments in its services, inclusive of each monthly fee. Brookson Legal Services are experts in employment law and conduct these assessments. This is because we recognise the importance and implications of being and remaining compliant with HMRC regulations and we have built robust systems in conjunction with HMRC to ensure the employment status of our customers. If you would like to discuss our services please feel free to contact us on: or contact@brooksonlegalservices.co.uk GET IN TOUCH SPEAK TO A MEMBER OF THE TEAM ON

7 TOP 10 TIPS The following tips provide a guide to addressing the implications of IR Ensure your contracts are accurate and consistent It makes little sense having a contract that states that you will be subject to the control of the client, or that the client s processes and procedures will apply to you when they don t in practice. In addition, make sure that the upper level contract (the contract between the agency and the client) does not contain anything that contradicts your contract with your agency or the way you intend to work on the assignment. 2. Make sure your client thinks the same way you do If your client sees you as an extension of its own workforce, the company is more likely to control what you do and treat you as an employee. Make sure they know that you are engaged for a specific reason and that they treat you accordingly throughout your assignment. If the client has more work for you, make sure you put a separate contract in place. 3. Ensure that the client s representative views you as an independent consultant not just part of the employed workforce This is particularly important where your client representative is different from the individual who hired your services at the outset of the project. If necessary, provide a copy of your contract to the client representative to avoid any misunderstandings regarding the extent of the services you are providing. 4. Demonstrate that you are treated differently from your client s employees in terms of the services you provide and how you perform them Different pay and benefits will not be enough on their own. Flexible working, assignments for other clients, investing in your own training, development and equipment, working on a specific package of work for a fixed fee and/or a fixed period are all good ways of showing that you are truly independent. 5. Working as part of a team does not automatically render you a disguised employee of the client It is essential however, that you agree the scope of the work you undertake at the outset of the assignment. Being continually allocated further work by the client, particularly without putting in place additional contracts, could show that you are being treated as an employee. If further work comes up, make sure you put a contract in place before you start working on it. Quote a fixed price or overall fee estimate up front wherever you can. GET IN TOUCH SPEAK TO A MEMBER OF THE TEAM ON

8 6. Provide a substitute Not only does providing a substitute give unequivocal evidence that you are not obliged to offer a personal service, and therefore cannot be a disguised employee, it can also enable you to profit further from the assignment by supplying cheaper labour to perform the services on your behalf. It could also give you the flexibility to work on another contract with a different client, further increasing the income received into your business. 7. Project based assignments are significantly better than period based ones Being engaged on a specific project enables you to quote a fixed fee and work flexibly as long as deadlines and project completion dates are met. Being engaged on an ongoing basis may suggest you are only there until the client recruits a permanent employee to do your job. This may indicate that the company is treating you as if you were that individual until someone permanent comes along which can potentially make you a disguised employee. 8. Manage your own assignments Employees are generally contractually obliged to give up their time for a fixed number of hours each day/week but, as an independent contractor you should determine the hours required to complete the work. It is important that you take control over managing your assignments and don t rely on being allocated work. This should also enable you to quote a fixed fee for the project and/or undertake work for other customers alongside your assignments. 9. Calling yourself a contractor and not receiving holiday or sick pay are not enough on their own to prove that you are not an employee of the client Your working practices and other terms of the contract must indicate that you are self employed. This could involve you showing that you have financial risk in terms of bad debts, rectifying work at your own cost and investing in your company, all good badges of trade. 10. Working for multiple clients and investing in your own company is still a good way of demonstrating that you are in business of your own account The more clients you work for, the easier it is to demonstrate that you are self-employed whereas only having one client as your sole source of income for a lengthy period of time may suggest that you are employed by the end client. To counteract this, pay for your own training, provide as much of your own equipment as possible and advertise your services on LinkedIn, your website or in magazines like the Yellow Pages. 8

9 IR35 FAQS WHAT IS IR35? IR35 is the industry name for legislation originally contained in Schedule 12 of the Finance Act This legislation, also known as The Intermediaries Legislation states that if you are treated as a disguised employee of the agency or client, your income on that assignment should be taxed as an employed earner (i.e. subject to income tax and national insurance contributions). IS THERE A LEGAL DEFINITION OF AN EMPLOYEE OR AN INDEPENDENT CONTRACTOR? No, there is no statutory definition of either an employee or independent contractor. Case law, established by the courts over previous years, is used to determine whether someone is treated as an employee (engaged under a contract of employment) or a self employed, independent contractor (engaged under a contract for services). HOW CAN I AVOID IR35? There is no way around IR35 if you work through a Limited Company and draw dividends from the company s profits. However, there are ways of ensuring compliance with IR35 and this is something Brookson Legal Services is on hand to assist you with, as part of our all-inclusive Limited Company service. HOW DO I GET THIS RIGHT FROM THE BEGINNING? Brookson Limited Company customers benefit from unlimited IR35 reviews via Brookson Legal Services, to ensure that you comply with your tax and NI obligations, whist working on assignments as a Limited Company contractor. Brookson Legal Services use the same employment status tests utilised by HMRC which are designed to assist in establishing whether your working practices support you being an independent contractor, or whether you are being treated by your client as a disguised employee. The initial review is available to customers when they first start a project or assignment. A refresher review is available to customers when they have been on a project or assignment for six months or more to ensure that your working practices continue to support you taking dividend income from the assignment with your client. 9

10 HOW IS AN ASSIGNMENT DEFINED? An assignment is a fixed project or body of work you undertake with a client. Ideally each assignment you undertake should be for a specific body of work or for a fixed period of time as opposed to a rolling contract. This is because rolling contracts suggest that you are at the beck and call of the client which means that you are more likely to fall inside IR35. HOW LONG SHOULD MY NOTICE PERIOD BE? A short notice period (or no notice period at all) can indicate that your company carries some financial risk in the contract. This is because there is a risk of losing the assignment with little warning. This is the opposite of how an employee would be treated as employees are more likely to have a lengthy notice period to terminate their employment. Therefore, a short notice period will help you to demonstrate that you are not treated as a disguised employee of your client. I HAVE NOT RECEIVED A CONTRACT FOR THE ASSIGNMENT I AM WORKING ON AND I AM NOW WORKING MY NOTICE, DO I STILL NEED A CONTRACT? Even though notice has been served and the contract is due to come to an end, services have been provided under a contract and so it is still important to obtain a written document which demonstrates your independence from the client. HOW LONG DOES AN IR35 REVIEW TAKE? As part of Brookson s all-inclusive Limited Company service, Brookson Legal Services reviews all documents within 5 Days of receipt. If the review reveals queries which Brookson Legal Services would like to discuss with you, they will telephone you to clarify the queries as quickly as possible. IS IR35 AFFECTED BY WHO MY CLIENT IS? Yes. If your client is a Public Sector body, they will be responsible for assessing your IR35 status and ensuring your appropriate tax is deducted at source where you are caught by the IR35 rule. In the 2018 Autumn Budget, the Government announced that the Private Sector will be subject to similar changes to IR35 to those implemented in the Public Sector in April These changes will take effect from April 2020 and a further Consultation will be launched in 2019 to fine-tune how it will work. This means that the obligation to determine if a role is inside or outside IR35 and ensuring the appropriate amount of tax is paid, will be changing in April 2020 and will sit with the end-hirer and the fee payer. Until then, you will still be responsible for ensuring IR35 is considered on all of your assignments and bear the liability for ensuring appropriate tax is paid on your income. 10

11 I AM WORKING ON VARIOUS PROJECTS AND HAVE A CONTRACT THAT IS REVIEWED ANNUALLY; DO I NEED TO DO ANYTHING TO PROTECT MY IR35 STATUS? Ideally, you should have a contract for each project or body of work you undertake. Quote a fixed fee per project if possible and ensure that you obtain a contract for any other work you undertake for the client. Project based contracts are significantly better than period based contracts. WHAT ARE THE ADVANTAGES OF GETTING AN END DATE FOR THE PROJECT I AM WORKING ON? When considering this matter from an IR35 perspective, it is important that we first consider the purpose behind not putting an end date on the contract. Usually, the end date is left open where you are not engaged for a specific project. In which case, you will be engaged on an ongoing basis, usually to fill a gap in the client s workforce whilst it navigates a particularly busy period or tries to recruit a permanent employee with the necessary skills and qualifications. In these cases, you are likely to struggle to defend an IR35 challenge on the basis that you have been brought in to carry out the function of an employee for the client. Therefore, a lack of an end date on the contract may be of little help to you from an IR35 perspective and will generally raise more questions than it answers. Conversely, where you are engaged on fixed projects or fixed bodies of work, you are in a far better position to defend an IR35 challenge than those contractors who are engaged for a period of time. Where the project has an estimated or fixed completion date, this should be noted on the contract even if it is referred to as an estimated completion date. The date can be extended should the project run over so the end date need not act as a guillotine to the assignment. This will indicate that you have been engaged for a specific period/body of work and once that work is complete the relationship comes to an end. Any further work will require another contract to be issued. The end date will therefore go some way to demonstrating that there is no mutuality of obligations between you and your end client as there is no obligation to provide further work when the contract comes to an end as it was envisaged at the outset that the relationship would cease when the project was finished. Finally, it is important to retain some perspective on this issue. Having an end date may provide some assistance to you in defending an IR35 challenge, but it won t win the case on its own. It is essential that all other features of the relationship between you and your end client are consistent with that of a self-employed relationship as opposed to employer/employee. HMRC will consider issues such as control, substitution, being in business of your own account, financial risk, integration and the ability to profit from your own sound management as well as mutuality of obligations as discussed above. 11

12 IS THERE A DIFFERENCE BETWEEN THE DIFFERENT IR35 TESTS IR35 INDICATORS, BADGES OF TRADE OR EMPLOYMENT TESTS? No they are just different ways of referring to the tests that have been established by the courts to determine whether you are engaged under a contract of service (i.e. a contract of employment) or a contract for services (i.e. a self employed contract). WHAT ARE THE EMPLOYMENT TESTS WHICH HAVE BEEN ESTABLISHED BY THE COURTS? There have been several tests used to establish whether someone is engaged as an employee, some of which are as follows: Can you provide a substitute? Are you subject to the client s direction, supervision or control? Is there mutuality of obligations between you and your client? Do you bear any financial risk? Do you invest in your own business? Is your income subject to tax and national insurance at source from your client? Do you provide your own equipment and training? Do you recieve holiday/sick/maternity pay from your client? I HAD AN IR35 REVIEW AT THE START OF MY ASSIGNMENT WITH THE CLIENT OVER SIX MONTHS AGO, DO I NEED ANOTHER REVIEW? Yes, ideally you should have a review of your working practices at least every six months even though you may think nothing has changed. Having a review every 6 months will enable you to ensure that your working practices accurately reflect the contract that you agreed at the outset of your assignment. It is essential that your working practices continue to reflect that you are an independent contractor and that you are not being treated as just an extension of your client s workforce. 12

13 I WORK FOR MULTIPLE CLIENTS AT ANY ONE TIME. DO I STILL NEED TO HAVE AN IR35 REVIEW? It is recommended that you have a review for each client you work for to ensure that you remain compliant with IR35 on each assignment. MY CONTRACT IS FOR A FIXED PERIOD WHICH HAS NOW EXPIRED BUT I AM STILL WORKING FOR THE CLIENT. SHOULD I GET A NEW CONTRACT? Yes, you should obtain a contract to cover the additional period and ensure that it accurately reflects the project/body of work you are working on. WHAT DOES IT MEAN IF I AM CAPTURED BY IR35? In most cases the most tax efficient way to withdraw funds from a limited company is by taking a mix of directors fee and dividends. However, where a contractor is being regarded as a disguised employee and therefore caught by IR35 (i.e. the contractor is treated by the client in a manner which is similar to how HMRC would expect an employee to be treated) this will mean that the contractor is viewed, in all but name/pay/benefits, as an employee of the company. The contractor must therefore pay tax and national insurance similar to an employee and as a result cannot benefit from the national insurance savings associated with drawing dividends. WHAT DOES IT MEAN IF I AM NOT CAPTURED BY IR35? If an IR35 review concludes that your contract terms and conditions along with your working practices support your status as a self-employed independent contractor, there is no further action required at this point. However you will need to undertake a new IR35 review either in six months time (if you are still on the same assignment) or when you change assignments, whichever is sooner. Brookson Legal Services refer to this outcome as Taxed as Self Employed to make it clear that you are only required to pay corporation tax on your dividends. 13

14 WHAT DOES IT MEAN IF THE OUTCOME OF MY IR35 REVIEW IS CAUTION? This is where your working practices appear to support a self-employed status but your contract Terms and Conditions do not. As part of Brookson s all-inclusive Limited Company service, Brookson Legal Services will identify the issues in your Contract and we will contact you to discuss their findings. The status of the assignment will be given as caution. In this case, there may be further steps you can take to resolve the uncertainty and these will be explained to you. Brookson Legal Services can negotiate the contract with your agency or end client. However, if you prefer to do so Brookson Legal Services can provide you with the necessary advice for you to negotiate the contract with your agency or end client yourself. WHAT ARE THE POSSIBLE OUTCOMES OF AN IR35 REVIEW? There are three possible outcomes following an IR35 review: Taxed as PAYE (captured by IR35) - a deemed payment calculation may be necessary or you should pay PAYE on your income from that assignment; Taxed as self employed (not captured by IR35) - you can continue to receive dividends from the company without deduction of additional tax and National Insurance Contributions. Caution outcome i.e. there are a few items which HMRC may query with you, which point towards being caught by IR35 that you may wish to address, but overall your contract and working practices point to being self employed which may be sufficient for HMRC in the event of an enquiry into your company. 14

15 IF MY ASSIGNMENT IS CAPTURED BY IR35, WHAT DO I NEED TO DO? If the assignment is shown by a review to be captured by IR35, your tax position changes. Previously, this income may have been taken as a dividend from the company and accounted for accordingly. However, in order to comply with IR35, you will now need to account for this income differently and pay any associated liabilities for income previously received and income received for the remainder of the assignment. Therefore, there will be additional tax for your company to pay. Any PAYE due relating to payments received into your company bank account in relation to this assignment before your IR35 status was confirmed will need to be recalculated and your year-end accounts and tax returns will need to be prepared (and previous years amended if income from the assignment has already been included on returns submitted to HMRC or Companies House) on the basis that the assignment is caught by the IR35 legislation. HOW WILL I KNOW IF MY CONTRACT IS INSIDE/CAUGHT BY IR35? Ask an expert to review it for you. They know the clauses that demonstrate IR35 compliance and what to look out for. Unlimited IR35 reviews are available to all Brookson One Limited customers. BEING CAPTURED BY IR35 IS NOT THE END OF CONTRACTING? It really is not the end of the world to be captured by IR35 and the earlier in your assignment that you have a review, the better placed you will be to deal with it. Whilst being captured by IR35 will result in you incurring higher NIC liabilities in respect of the income received from your captured assignment, it doesn t mean that you should stop working through your limited company. There are still significant benefits to continuing to work in this way as opposed to working via an umbrella company or working on the agency payroll, including: Flat Rate VAT benefit Flexibility in working arrangements Ability to put business expenses through your company If you are a Private Sector worker, there is also a flat rate 5% expense allowance deduction available to reduce the PAYE/NICs paid 15

16 The scary stories of contractors closing their companies because of IR35 usually occur where the contractor has ignored IR35 for some time and is faced with a large PAYE and NIC bill from HMRC, along with additional interest and penalties for not paying the additional tax in the tax year it was owed. All of this can be avoided by having an IR35 review early in the assignment and continuing to have regular reviews to ensure things have not changed. WHAT IS THE MSC LEGISLATION? The MSC legislation affects composite companies and companies which are managed and controlled by advisors rather than the directors/shareholders of a company. The MSC legislation does not make these companies illegal; it merely requires the company to operate as if IR35 applied to income paid by the company irrespective of an IR35 review. Essentially, to pay a little more tax and NICs than it would usually do if it was outside of IR35. WHAT IS A PERSONAL SERVICE COMPANY (PSC)? There is no legal definition of a PSC, however, it is generally accepted that a PSC has a sole director and 1-2 shareholders. HOW DOES IR35 AFFECT UMBRELLA COMPANIES? IR35 does not apply to umbrella companies as they do not pay dividends to its employees. All income is taxed on a PAYE basis, thus making IR35 redundant. CAN I INSURE MYSELF AGAINST ANY COSTS OR TAXES? There are insurance products available, but these products require you to undertake IR35 reviews with reputable solicitors or accountants for the policy to be effective. With Brookson, you have the peace of mind around IR35 from the reviews Brookson Legal Services undertake and you can rely on the tax promise if you are investigated by HMRC. SHOULD I TAKE OUT IR35 INSURANCE? This depends on how much your trust the IR35 review undertaken by your professional advisor. It isn t necessary in all instances, but we appreciate there is certainly a place for this type of insurance in the market place. However, most insurance policies require you to seek professional advice in relation to your IR35 status and you should ensure that you follow any professional advice you receive. 16

17 WHAT WOULD HAPPEN IF I M INVESTIGATED, HOW DO BROOKSON HELP? If you have had a full IR35 review with Brookson Legal Services, we will have to hand all of the information required for the investigation with HMRC. Whilst we may look to clarify some elements of the assignment and we will be in contact with you throughout to ensure you are kept up to date, we will deal with HMRC s queries directly on your behalf and at no extra cost to you. If you have not had a full IR35 review with Brookson Legal Services, we will be happy to liaise with HMRC on your behalf, but we are likely to require more information from you in order to do so. There may also be additional fees for undertaking this work and they will be agreed on a case by case basis depending on the number of assignments undertaken during the period under investigation and the anticipated volume of work involved. I THOUGHT THAT I WAS OUTSIDE IR35 AND NOW THINK I M CAUGHT. WHAT SHOULD I DO? Depending when you found out about the error, there are two ways of addressing this: For current year accounts: we will adjust the amount of tax and National Insurance Contributions you pay on the income received from an assignment. We will rerun the payroll on a captured basis taking advantage of the 5% discount HMRC provides to businessespaying tax in this way. This is not available when your client is in the Public Sector. For previous year accounts: We will revise the PAYE documents and company accounts but there may be penalties and interest levied 17

18 ARE ALL CONTRACTORS (TEMPORARY WORKERS) INCLUDED UNDER IR35? Only if they work through a Limited Company and receive dividend income. If I have worked for a client before will I be captured by IR35? This depends on the capacity in which you worked for the client previously. If you were employed with the client previously you are at a high risk of being caught by IR35 on this assignment unless you can distinguish between the roles undertaken as an employee, compared with your current assignment. If you were engaged as a self-employed contractor/limited Company contractor/umbrella employee with the client previously you are at a lower risk of being caught by IR35. It is still important to demonstrate that you are treated differently by the client compared to way the client treats its employees. HOW CAN I STRENGTHEN MY IR35 POSITION? Have an IR35 review with an expert and talk about your personal circumstances. Brookson Legal Services have lots of ideas to strengthen your IR35 status and we are happy to share them free of charge. WHAT SERVICES CAN I OBTAIN FROM BROOKSON LEGAL SERVICES? We have negotiated the following discounted rates with independent law firm and employment specialists Brookson Legal Services for all Brookson Limited Company customers: IR35 review IR35 refresher review IR35 contract negotiation Draft terms of business contract of employment (to enable your company to employ staff) Sub-contractor agreement Commercial review of terms and conditions Free Free Free 149+VAT 199+VAT 199+VAT If you are interested in any of the above services or if you require any additional legal services, please feel free to contact Brookson Legal Services on contact@brooksonlegalservices.co.uk. 18

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