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IR35 Contractor FAQ’s

The private sector’s contracting workforce is about to change as IR35 reforms are set to be introduced in April 2020.

With many contractors confused about how IR35 will affect their assignments, we answer the most frequently asked questions about the IR35 process, how it will affect contractors that fall inside the scope of the new legislation, and how they can ensure compliance.

What is IR35?

The Government introduced IR35 legislation laws almost 20 years ago, as a means of tackling off-payroll workers (often referred to as contractors), who supply their services to a company via an intermediary e.g. a Ltd Company/PSC or Umbrella Company, but who should, actually in their opinion, be deemed to be employees of the client.

IR35 “off-payroll” working in the public sector

The Government announced a further clampdown on what they called “off-payroll working”, in 2016 and this was applied to the public sector. The public sector client was then made responsible for the status of the contractor’s assignment and if it was determined to be ‘inside IR35’–the contractor’s working arrangements would be deemed to be similar to company employees and subject to income tax and national insurance deductions.

IR35 “off-payroll” working to be introduced to the private sector

The current position within the private sector is that the contractor is responsible for determining whether their assignment is inside or outside of IR35 legislation, but this is planned to be changed in April 2020.

What is changing?

Public sector clients are now responsible for the new IR35 “off-payroll” rules and HMRC has decided to introduce similar changes into the private sector. This will apply to larger and medium sized businesses.

According to HMRC, the current IR35 process has not been effective, as a substantial amount of Ltd Companies are not assessing and paying tax correctly, and therefore they are introducing reforms to improve the process.

Key change: The main change is private sector businesses that enter into contracts or make payments to workers engaged through a Ltd Company/PSC have to check the workers’ tax status.

This change is due to be implemented on April 6th 2020.

Does this change apply to all companies?

The change in IR35 rules will apply to “larger and medium sized businesses but not where the end-client is a small company”.

A small company is defined as a business that meets any two of the following criteria:

  • Annual turnover of not more than £10.2 million
  • A balance sheet total of not more than £5.1 million
  • No more than 50 employees.
Where the end-client is a small company, the responsibility for assessing and paying tax will stay with the contractor’s Ltd Company.

How will this affect my existing contract?

If you are currently working via a Ltd Company/PSC, on an assignment that continues through April 2020, the end-client must determine whether your assignment falls inside or outside of IR35 before the changes take effect. The client must take “reasonable care” in reaching the status determination.

If your assignment (and any payments made in relation to it) continue after April 2020 and the end-client decides that your assignment falls within IR35 you will have a number of options:

  • Continue the assignment through your Limited Company/PSC but the “Fee Payer” will deduct Tax & NIC from any payments due and pay the net value.
  • Continue the assignment on an adjusted PAYE rate based on the Limited Company/PSC rate, minus Tax & NIC and other costs.
  • If appropriate move to a PAYE agency contract.
If your assignment is determined to be outside IR35 by the end-client:

  • You will be able to continue working through your Ltd Company/PSC and no tax deductions will be made by the agency or end-client.
If you currently work via PAYE or Umbrella models, or receive payments to your Ltd Company/PSC net of income tax and national insurance, these changes will not affect your pay.

Do I get employment rights if I am inside IR35?

Should you wish to continue operating as an inside IR35 contractor, you will not benefit from any “worker/employment rights” such as holiday pay, sick pay, pension contributions, dismissal rights etc. You may receive these benefits through your employment in your Ltd Company/PSC.

However, if your assignment falls inside IR35, it is likely that you are no longer in business on your own account and could be within scope of the Agency Worker Regulations (AWR). Under AWR you are entitled to comparable pay to a permanent employee on the clients site.

How does this affect my future contracts?

For assignments starting after April 2020, end-clients will be required to specify whether a workers assignment is inside or outside of IR35 before work is started.

End-clients and agencies must ensure the status of your assignment is clearly indicated to you when discussing contracting opportunities.

Are short term contracts (1-2 months) liable to IR35?

As each assignment is looked at by HMRC in its own right, there are currently no unique rules set for short term contracts.

My assignment is for 2 years – is it automatically inside IR35?

The 24-month rule is in reference to claiming travel expenses. This rule has no bearing on the IR35 status determination for the assignment.

What if I have concurrent assignments for two different companies?

Each of your assignments must be assessed separately. And it is possible that one assignment could be deemed to be outside and the other considered to be inside the IR35 scope.

Will all contracts be subject to IR35?

End-clients are obliged to provide all contractors with an IR35 determination, stating whether their assignment is inside or outside of IR35.

Would I be able to carry on with my current role as self-employed rather than a Ltd Company/PSC?

No, self-employment is governed by the intermediaries’ legislation.

What happens if I disagree with my IR35 status?

In cases where contractors do not agree with their assigned IR35 status, end-clients are required to provide a ‘status disagreement process”, allowing them to review their IR35 determination.

If a contractor disagrees with the determination, they have the right to make representations to the end-client, detailing why they believe the determination is incorrect.

From the receipt of these representations, the end-client will have 45 days to consider them. Once the representations have been considered, the end-client will either change its determination or provide reasons for deciding that the original IR35 determination was correct.

You will need to keep records of status determinations and any corresponding disagreements.

Note: During the dispute process the client’s determination stands.

Will current contractors be offered permanent roles?

This choice may be possible if there is a vacancy and there is agreement between the contractor and the client.

Will HMRC contact the contractor or end-client if they determine a contractor falls inside IR35?

Before April 2020 any liability will lie directly with the Ltd Company/PSC, which means they will be the first point of contact.

After April 2020, the end client and/or fee payer will be the first point of contact.

Is there a definitive way to determine IR35 status?

Although the Government is recommending businesses use their CEST tool to make an assessment, it is ultimately the decision of the end-client to decide which assessment tools and methods to use when making their decision.


How will IR35 affect my take home pay and taxes?

If your existing role is deemed within IR35 scope and you wish to continue to be engaged via your Ltd Company, a new contract must be issued and the agreed rate will be subject to both tax and all NI deductions by the fee payer.


Will the agency or end-client be liable for paying NI contributions for contractors?

If engaged via a recruitment agency, the appropriate deductions from your rate will be made by the agency.

Would I be liable for past PAYE tax if I was found to be working outside IR35?

Although HMRC has not stated that tax could be sought retrospectively, this approach has not yet been ruled out.

Can I set up a shared PSC to facilitate my right of substitution?

There are suggestions that contractors could set up a Limited Liability Company with a small group of contractors to allow them all to effectively exercise their right to substitution. This could be a practical way of operating provided that all of the contractors are directors and shareholders and collectively control the business. This will need serious consideration and bespoke advice.

Can I convert to working under a Statement of Work (SOW) contract?

There are concerns about converting a current time and materials contract to a SOW contract as the contract must accurately represent the reality of what happens during the assignment. However, for new assignments, with new clients, this may be an option for highly skilled contractors.

In an assignment where a contractor agrees to perform specific tasks or deliver certain outcomes for a set price and within an estimated delivery time, there is less likelihood of the client exerting control over the individual. A SOW contract, if appropriately executed, is likely to be outside IR35, compared with the traditional time and materials-based contract on a set hourly or day rate.

It is more likely that an assignment will fall outside IR35 if the performance of the services carries a genuine business risk, e.g. payment is conditional upon acceptance of services or satisfactory performance; rectification of defects or poor performance are made at the contractor’s cost.

Although this may seem like an easy option to adapt to the new rules, you will remain at risk if the reality of the contractual performance does not reflect the contractual wording.

Not all assignments are appropriate as a SOW contract and this will depend on whether the recruiter and the end client offer this option.

The FAQs section is updated on a regular basis; make our website IR35 Hub your first “port-of-call” for the latest information on the IR35 reforms.

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