The changes to IR35 tax legislation have left many interim staff and employers dismayed and confused. How will it work? What are the risks? And how can contractors and companies operate in compliance? With these concerns in mind, we asked Martyn Valentine, a lawyer and IR35 expert to answer a few key questions and share his expertise. He explains the challenges of working with IR35 and how Colnort’s innovative service-based consulting model can help all parties avoid the risks.
1. WHAT ARE THE CURRENT CHALLENGES AND RISKS TO BUSINESSES TAKING ON CONTRACTORS IN THEIR HANDLING OF IR35?
The forthcoming extension of the off-payroll legislation to the private sector has created serious challenges for medium and large clients engaging limited company contractors. Once the draft legislation has been passed, medium and large clients will be responsible for undertaking status determination statements for each contractor to determine whether the engagement constitutes self-employment or not. Where HMRC disagrees with a client’s status determination statement the client will be liable for additional employment tax. The Taxes Management Act 1970 entitles HMRC to commence an IR35 inquiry up to 6 years following the end of a tax year in question.
The extension of the off-payroll legislation to the private sector has been delayed until 6 April 2021 so the existing IR35 legislation remains applicable for all private sector engagements. In the meantime, contractors remain responsible for seeking independent legal advice on the IR35 status of an engagement and for any additional taxes following an adverse HMRC inquiry.
At present, a medium or large private sector client cannot become liable for employment tax where an engagement involving a contractor ends before 6 April 2021.
2. HOW DO CLIENTS EFFECTIVELY MANAGE THEIR IR35 RISK POST APRIL 6/4/21?
Post-April 2021 medium and large clients will be required to take reasonable care in relation to each contractor by undertaking individual status determination statements. A blanket decision is not taking reasonable care. A status determination statement is in effect a review of the contract and working practices and requires expert legal advice. It is anticipated that clients will struggle to undertake status determination statements and evidence confirms that clients would rather incur the risk of litigation posed by employing contractors than continuing to engage limited company contractors.
The primary reason why contractors have hitherto been preferred by clients is that the nature of the work required, e.g. IT projects, requires flexibility which is not compatible with conventional employment. Employing contractors means all the usual risks of employing staff, i.e. claims under the Equality Act 2010, Employment Rights Act 1996, etc, plus the added expense of perks.
The solution is the outsourced consultancy model where a main contractor is responsible for delivering projects using a team of sub-contractors. This model envisages that the main contractor, i.e. Colnort, is responsible for tendering for and delivering the work and is not acting as a recruiter. Colnort is a small company and can, therefore, make use of the small companies exemption in the draft off-payroll legislation. Consequently, responsibility for assessing employment status remains with the contractor and not Colnort’s customer.
3. WHAT ARE THE CURRENT RISKS AND CHALLENGES FOR CONTRACTORS?
Many medium and large clients, such as banks and insurers, have made policy decisions to not engage contractors owing to misguided legal advice regarding the risks of incurring a large tax bill following April 2021.
In the period leading to the planned implementation of the off-payroll rules, many financial institutions made damaging and false status determination statements which claimed that an engagement was caught by the IR35 legislation. As a result, many contractors are now confronted by the risk of a future HMRC IR35 inquiry where the former client will be a hostile witness. This is a terrible mistake for such clients.
As explained below, alternatives such as the use of umbrella companies are undesirable for a multitude of reasons not limited to additional cost and unlawful deduction of employer’s National Insurance contributions.
4. HOW COULD A BUSINESS LIKE COLNORT HELP BUSINESSES AND CONTRACTORS OVERCOME THE IR35 CHALLENGE?
As Colnort meets the statutory definition of a small company and its legal capacity is the client of the contractor, Colnort is ideally placed to help contractors and clients overcome the challenges posed by the reforms to the off-payroll rules. The draft off-payroll legislation does not apply to small companies so responsibility for assessing the IR35 status of an engagement remains with the contractor. Therefore, when the reforms are enacted in April 2021, Colnort’s customers are neither required to invest in specialist legal advice nor assume risk of additional employment tax.
To provide added assurance, Colnort can offer status determinations using IR35 determination partners which use interactive tools that produce accurate Status Determination Statements using information provided by the contractor and client. The resulting Status Determination Statement is sufficient to demonstrate that reasonable care has been taken in respect of assessing IR35 status.
5. WHAT COULD HAPPEN IF A CONTRACTOR/COMPANY MISHANDLES IR35 DETERMINATION OR NEGLECTS IT ENTIRELY?
Pre-April 2021 a contractor incurs risk of an HMRC inquiry and if it has not sought legal advice HMRC may impose penalties and interest if the conclusion of the inquiry is that the engagement is caught by the IR35 legislation.
After April 2021 if a client mishandles an IR35 status determination, e.g. by declaring an engagement outside IR35 where the services description refers to a role, then the draft off-payroll legislation renders the client liable for the applicable employment tax including income tax and National Insurance contributions.
In both cases, appealing a Notice of Determination issued by HMRC to the First-tier Tribunal (Tax) can be costly where specialist counsel is instructed.
6. ARE CONTRACTORS/COMPANIES SEARCHING FOR OR STRUGGLING TO FIND A SOLUTION BEYOND THE CURRENT OPTIONS? ARE THEY WORRIED, CONFUSED OR FEARFUL OF BREAKING THE LAW?
Unfortunately, various agencies are making offers of engagements conditional on the use of umbrella companies from preferred supplier lists. This is a breach of the Conduct of Employment Agencies and Employment Businesses Regulations 2003 and potentially a criminal offence in respect of the Employment Agencies Act 1973.
Umbrella companies often unlawfully deduct employer’s National Insurance contributions by relying on false contractual terms permitting the deduction of ’employment costs’. Umbrella companies often incorrectly process holiday pay leaving contractors short changed and unlawfully deduct the Apprenticeship Levy. There is no legal reason to use an umbrella company.
Where clients have made blanket decisions that contractors are inside IR35 contractors can seek compensation from such clients for breach of the Agency Worker Regulations 2010 and negligent misstatement where a false status determination statement has resulted in extra legal costs.
7. WHY IS THE COLNORT ALTERNATIVE A PERFECT SOLUTION?
The consultancy option provided by Colnort provides a straightforward solution. Colnort’s contractual responsibility is to provide the services to its customer using a team of contractors. As Colnort is receiving the benefit of the services provided by the individual contractors it is the client for the purposes of s.61N Income Tax (Earnings and Pensions) Act 2003 and, therefore, has responsibility under the forthcoming off-payroll legislation to issue a status determination statement for each contractor. This arrangement shields the Colnort’s customer from the responsibility of undertaking status determination statements and incurring risk of liability for backdated employment tax.
About the Author
A Director at The Law Place since 2010, Martyn Valentine is a qualified lawyer and IR35 expert. Since graduating from the University of Sussex in 1998, Martyn has gained a postgraduate diploma in Legal Practice, achieved a CIPD qualification and built a wealth of experience in commercial management, HR, recruitment and employment law. Over the last 15 years, he has advised extensively on employment relations, employment status and IR35, acting for many limited company contractors in contentious HM Revenue & Customs Employer Compliance Reviews. Notable successes include the famous Datagate case. More recently, Martyn has worked as a Legal Adviser for the Recruitment & Employment Confederation providing specialist advice on the IR35 legislation, employment law, commercial risk management, data protection, immigration and other issues involved in running a recruitment business.