Kevin Barrow and Frances Lewis, of Osborne Clarke’s Workforce Solutions Sector practice, answer the IR35 questions that employers and staffing companies are asking. The questions indicate the line of thinking and concerns carried by these groups, which are dependent on a flexible and skilled freelance workforce.
But where do contractors come into the equation and are they unfairly being put into a one-size-fits-all category by hiring and staffing companies?
Will IR35 really happen?
It is already law. It will require new legislation to prevent it coming into force. (But see question 6 below!)
Are insurance-backed IR35 risk management services a good or bad idea?
Many companies are looking at insurance as a simple solution.
However, some of the insurance-backed products we have seen in the market may create serious tax risk and we strongly recommend staffing companies, MSPs and end clients proposing to use insurance-backed products take legal advice on the effectiveness of the particular insurance they are relying on and the MSC risk associated with sections 61B (2) (e) and 688A of the Income Tax (Earnings and Pensions) Act 2003.
These MSC rules mean that obtaining insurance relating to contractor tax matters can in itself create a tax liability (even if the contractor is genuinely outside IR35). There are potentially serious personal liabilities for directors in relation to this. Staffing companies, MSPs and end clients may well conclude they would be better off without the insurance.
What is the latest HMRC position relating to Statement of Work style engagements being outside IR35? Where do people make key mistakes which could lead to liabilities?
HMRC says it is on the look-out for “dressed up SOW”. But there are SOW structures which should not cause problems.
What will be the impact of blanket bans on the use of personal service company arrangements (PSCs)?How can staffing companies and end clients get comfortable with “PSCs outside IR35” as an option where appropriate?
There are some good methodologies which will help deal with this, and yes the increase in home-working can have an impact in making PSC usage ok.
Will IR35 apply to any PSCs paid under the Construction Industry Scheme (CIS)?
Yes – IR35 trumps CIS. Companies paying under CIS will need to go through IR35 procedures.
Will IR35 apply to payments to any companies which pay workers other than on a full PAYE basis/sole trader basis (for example, under CIS)?
There was a last-minute change to the 2020 Finance Act which has this effect. That means some types of arrangement offered by some umbrellas could be covered by IR35. It is hoped that the law will be changed which will require another vote (for amending legislation) in Parliament, which HMRC have recently said is being considered.
Will end clients MSPs and staffing companies start blanket-banning umbrellas/other payment intermediaries and if so what should we do?
Yes, probably they will in some cases and some already are. There are things to be done to make sure umbrella usage in your supply chain is safe for you and anyone above you in the supply chain.
Will the new IR35 regime lead to the emergence of aggressive new tax avoidance schemes we need to avoid in our supply chain? What do we need to do to avoid liability under the Criminal Finances Act and tax debt transfer legislation if they are used in the supply chain (with or without our knowledge)?
Yes there will be (and there are already some coming to light) and you will need to do spot checks on your supply chain or suffer risk of unlimited fines. HMRC is actively looking at some of these schemes.
What should we do about contracts being issued now which may straddle 6 April 2020?
You should be anticipating how IR35 will impact them and suppliers should draft payment mechanisms allowing deduction/termination provisions to deal with this.
Should we be allowing contractors to operate via PSCs now if they have already been assessed in early 2020 as inside IR35 but we suspect the contractors are paying themselves on an “outside IR35” basis following the delayed start to IR35?
There is a risk that you will be liable for colluding in tax avoidance or facilitating tax evasion. However, there is a methodology to manage this risk and create a “reasonable procedures” defence.
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If you are a contractor with an IR35 question about your situation, contact Our Advice and Agony Aunt section, The Freelancers’ Couch, on firstname.lastname@example.org.
Do you believe contractors and freelancers are unfairly being put into a one-size-fits-all category by hiring and staffing companies? Do you have a positive IR35 story to tell? How is your umbrella company helping you out over IR35?
Share your thoughts in the comments section.