Here we set out what is currently crossing our desks with some tips for contractors on what they can do now to ensure a smooth transition over to the new rules from April 2021.
Many large companies made their decisions last year, with many having blanket bans on the use of limited company contractors. Many are already prepared but an awful lot, of all sizes simply ditched their plans, once the delay to the new rules were announced. These are now trying to pick up where they left off with little time left together with coping with the pandemic and all the difficulties this is causing.
We have been working with lots of new “small companies” especially “consultancies”. Many saw this route, as an easy way to circumvent the new rules so their contractors can simply carry on, as before. This is far from the reality though and many have got everything wrong and are unaware of the numerous other rules that will affect them e.g. Intermediary reporting requirements, agency rules and above all where the tax/NIC liabilities sit and what are their responsibilities.
Following on from this some agencies have set up a “Consultancy” arm or moved over to Statement of Work contracts seeing these routes, as the easy option. Both have their own sets of rules to be properly effective and need careful consideration of all the legalities.
The key message is that you cannot simply change labels without addressing the realities of each situation. Turning a time and materials contract into one with deliverables and milestones is difficult when contractors still need to be paid every month.
With HMRC’s CEST tool being found to be unfit for deciding IR35 status it seems numerous service providers have invented their own status tools. Some are a very good starting point in the IR35 decision, especially where there are large numbers of contractors to be assessed. Users of tools need to be satisfied that the underlying in-depth technical knowledge is correct and up to date. We are seeing cases where different tools are churning out different results and as with CEST, answers are being manipulated to get the right result, which is no good to anyone when HMRC comes calling.
For those whose contract straddles the old and new rules don’t wait until March or April or sit back and see what happens. Start talking to your clients and agencies now.
Do not rely on any IR35 determination given out last year before the new rules were delayed. Just because they said “outside IR35” then they may now have made decisions using different routes or changed their minds. The opposite equally applies so establish exactly what information went into the determination, who commented on your day-today working practices and did they obtain your input. Ask them about their processes of resolving any disputes. Satisfy yourself that “reasonable care” has been taken with your IR35 determination.
It is not enough to just be told that your provider is a small company and you can continue to make your own IR35 decisions. You must undertake due diligence. Always get it in writing from them that they genuinely fall under this exemption together with how they will notify you if this should change. Check out Companies House records and especially individual Directors to see their other businesses in case they are not really a small company.
Due diligence is required here to make sure everything stacks up. Beware of labels and if you are really not doing anything differently other than the words in your contract have changed then be careful before signing.
As always think and act like a genuine business. In the same way that you should check out agencies and clients you will be checked out too! Why have you not got business insurances “yet”? Why are you “still working” on creating a web site? Perhaps the worst one is when we look at social media sites and find that you said you have been contracting for many years but there is no mention that you are a contractor – just a CV linking to your clients, often showing you have risen through the ranks over the years – “disguised employment”? Don’t forget HMRC looks at these sites and consider that some who are viewing the site are looking for a contractor!
Last but not least seek advice and guidance from everywhere. Check out HMRC’s views, have a play with the CEST tool or others. Speak to your accountant and your colleagues. There is a mountain of free information out there. Establish the financial consequences of having your IR35 status changed. Now is the time to be pro-active.
Kate Cottrell
Bauer & Cottrell