Experts in contract recruitment

IR35 – A Brief History

IR35 was introduced in April 2000 as a piece of anti-avoidance tax legislation designed to tackle the perceived problem of “disguised employment”. Essentially, A disguised employee is a contractor whose limited company is engaged on a contract for services, however the contractor is being treated as though they were an employee of the company and therefore should be paying taxes on a PAYE basis. Any assignment “outside IR35” is classed as a genuine B2B service and is therefore not subject to the same tax treatment as employees.

Reforms to IR35 legislation relating to the Public Sector, which came into force in April 2017, moved the responsibility and liability of determining the tax status of all personal service company’s (PSC) interim workers & contractors to the agency or party paying the contractor.

Additional reforms were announced in the 2018 Budget, it was confirmed that the legislation would be extended to the private sector in April 2020, however, due to the coronavirus pandemic, this was delayed until April 2021.

Effect of Pandemic on IR35

In an uncertain economy that is still wrestling with the pandemic, the planned implementation of IR35 in 2021 is causing a great deal of uncertainty and stress throughout the UK labour market. Where the pandemic has created a recruitment freeze in many areas, the UK economy benefits from a flexible labour pool, however, the pandemic not only has affected contractor numbers, but has provided a real shift in how people work.

The way organisations work with contractors will have changed significantly since February 2020. Whereas contractors have worked at a client’s site previously, and have been relatively indistinguishable from employees, with the advent of remote working at home, supplying their own equipment and not under direct supervision or control of the end client, these elements could somewhat change their tax position. As many contractors were the first to see their work stopped to save costs during the pandemic, does this imply there was never a presumed mutuality of obligation (MOO) between the business and the contractor to provide work and offer services?

Due diligence and continuous assessments need to be conducted to best safeguard businesses and contractors alike, ensuring there is a robust process in place to avoid falling foul of the law.

Substitution

Contractually you should have a clause stating that you can use somebody other than yourself to perform the task your company has been contracted to do. This suggests the contractor isn’t providing a personal service, and the worker isn’t a disguised employee.

Control

Are you free to work under your own control i.e. not managed by the client? If an end business controls the workload of the contractor or how the work is carried out, it would suggest that the person is inside IR35 as they are not providing a specialist service as a contractor.

Financial risk:

Employees rarely risk financial loss by being employed, whereas if you buy assets such as PC’s, laptops, servers, printers, office equipment or a client fails to pay you as director of your company you will most definitely experience financial loss.

Mutuality of obligation (MOO)

Mutuality of obligation refers to the employer’s obligation to give work and the employee’s obligation to complete it. If both parties pass the above tests, it is unlikely that MOO applies as it will be deemed outside IR35. MOO can be present in both contracts of service and contract for service.

Please contact us to speak with one of our experts to help you navigate the issues surrounding IR35.