IR35 for Clients

IR35 for Clients



What is IR35

The off-payroll working rules – commonly known as IR35 – is designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used.

HMRC refers to such workers as ‘disguised employees’ as the worker doesn’t meet HMRC’s definition of self-employment, therefore, the correct tax and NI isn’t paid correctly. The rules to counter alleged tax avoidance via the use of ‘personal service companies’ became law in 2000 and remains in place today.

What is changing?

The IR35 employment assessment obligation, and the associated tax risk, has moved. Since 2017, in the Public Sector, obligation and risks now sit with the hirer and agency. The current Government has confirmed that similar changes will apply in the Private Sector from April 2020.  The rules around IR35 in the private and third sectors are not changing, but the liability of who holds responsibility for determining an interim contractor’s status does.

If the interim contractor is deemed to be working inside IR35, then MRG will have a statutory duty to ensure that tax & National Insurance contributions (both employers and employees) are applied to their payments which will affect the cost of those contractors.

The contractor will have the option to engage with an umbrella company or continue to work through their limited company under the “off-payroll” rules. Whether the contractor chooses to be paid “off-payroll” or via an umbrella company, there are likely to be additional costs to clients to cover the employers NICs. (NB: MRG operate as an SME, so the Apprenticeship Levy does not apply.)

How does this affect our clients?

Moving forward, we will ask for an “Employment Status Determination” for all interim contract assignments that we support you with. In simple terms that means that you will need to tell us if the assignment falls inside or outside the scope of IR35.

We are working closely with QDOS, the leading providers of specialist contractor insurance services in the UK and so MRG can offer each hiring manager support in the determination of whether a role should sit inside or outside IR35. In addition, if you would like further assurance, MRG through QDOS are able to carry out an independent review of an assignment for free. If it can be proven that reasonable care and consideration has been taken during the determination process, there is unlikely to be any comeback from HMRC

It is also important to note that an interim contractor can challenge the determination and so simply labelling all interim contractors as inside or outside IR35 is not exercising ‘reasonable care.’

What do you need to consider in making the determination?

The key tests involve assessing the areas of substitution, control and mutuality of obligation (MOO). Please note that all 3 of these tests need to be satisfied for the assignment to fall inside IR35. In other words, the answer to one or more questions in all of the categories needs to be “no” for the assignment to fall inside.  There are several online tests available, including the CEST tool provided by HMRC however they are not totally reliable, and some give an “inside” determination if only one test is failed. HMRC have also publicly ruled against CEST determinations in tribunals and dubbed it ‘unfit for purpose’.

The main tests in more detail are:

  1. Substitution
  • Would the contractor be permitted to supply an alternative individual on behalf of their limited company to provide the services?
  • Has the contractor ever exercised their right to provide a substitute?
  1. Control
  • Can the contractor decide where they work from day-to-day?
  • Does the contractor have the freedom to decide when they work?
  • Does the contractor work without direct supervision?
  • Can the contractor decide how to do the work without their method having to be checked by the client?
  1. Mutuality of Obligation (MOO)
  • Is the contractor working towards pre-defined deliverables or on a specific scope of work?
  • Is the contractor free to refuse tasks which arise and fall outside the scope of the agreed contract? Similarly, can they refuse future assignments?

What do I need to do now?

If we are currently supplying interim contractors to your organisation, we will have already contacted you to obtain your Employment Status Determination for each assignment. We will share the information that we have received from our legal partners and will happily introduce you to them should you wish to receive an independent view.

Once we know the status of the assignment, we will discuss the payment options with the interim contractor and will inform you of any additional charges that may apply.

Please rest assured that we will help guide you through these changes and will work closely with you and the interim contractors to minimise any impact.

If you have any questions regarding this, please email and we will come back to you as quickly as we can.

Inside IR35 Outside IR35
*Control *Control
The client controls how, when and where the services are delivered Contractor controls how, when and where the services are delivered
Part & Parcel Part & Parcel
Contractor is not viewed any differently to employees of the client Contractor is clearly identifiable as external resource and not an employee
Financial Risk Financial Risk
Contractor has no risk and paid regardless of the quality of the services provided May be working to payment on deliverables and will have to cover the cost of insurances
*Mutuality of Obligation *Mutuality of Obligation
Client obliged to offer additional work and contractor obliged to accept Contractor under no obligation to accept work other than that which is already agreed
*Substitution *Substitution
Client will not be willing to accept a substitute to provide the services Contractor could provide and pay a substitute
Equipment Equipment
Contractor not providing own equipment and will use the clients equipment Contractor likely to provide own equipment to supply the services agreed

* Key determining factor

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