IR35 2020 Changes: What They Mean for Clients and Interims
If youâ€™re an interim manager or member of a HR department, the changes to IR35 rules coming in April 2020 will be on your radar. But what do they actually mean for you? Hereâ€™s what to expect from the new laws and how to deal with them.
IR35: The Basics
IR35 was first introduced in 2000. Its function was to tackle tax avoidance of contractors who were otherwise treated as everyday employees. This is still its purpose today, but the government has found non-compliance to be all too easy and commonplace. The cost of this non-compliance is estimated to reach ÂŁ1.3 billion a year by 2023/24 if the rules arenâ€™t tightened.
If an assignment is inside of IR35, it means the contractor is deemed an employee for tax purposes. There are a number of factors that go towards determining this, which we set out below. On the other hand, contractors who are providing a genuine independent service, and are not just employees by another name, should fall outside of IR35.
In the private sector, it is currently up to contractors themselves to determine whether a contract falls inside or outside of IR35. From April 2020, it will be the responsibility of the end client to determine the IR35 status of the contractor. This system is already in place in the public sector.
The new rules means that all medium and large companies will have to re-assess the way they engage contractors, if they want to stay legal.
What Does it Mean in Practice?
There is some worry within the interim community that companies will deal with the new rules by using a blanket approach for all contractors. This is a legitimate concern â€“ a survey of 500 businesses earlier this year showed that 59% would consider a one-size-fits-all method.
However, such a strategy would not only be unlawful, but limit companiesâ€™ access to specialised talent. Interim managers have niche skills that often cannot be replaced by permanent staff members. There is also a whole host of additional benefits interims bring, including objectivity, dedicated focus and wide-reaching experience.
For these reasons, it is in businessesâ€™ best interest to assess contracts on a case-by-case basis. Our view is that while the reforms will no doubt alter the wider contracting landscape, highly-skilled, career interim managers will remain unaffected. If an interim manager is enlisted for their services and not otherwise treated as an employee, they should be safely out of scope.
How to Determine IR35 Status
HMRC look at the following areas to decide IR35 status. These should be kept in mind when taking on any new interim contract.
Supervision and control
When you hire an electrician to re-wire a circuit in your workplace, you donâ€™t expect to give them instructions. Nor do you have to supervise them, or dictate when itâ€™s time for a tea break. Interims should work on the same basis to stay outside of IR35.
Any of the following points suggest that an interim is an employee in disguise and therefore in scope of IR35:
- Directly supervised by a line manager
- Line-management, hiring or firing responsibilities
- Job matches that of a permanent employee
- Daily start and finish times set out in the contract
- Access to staff benefits â€“ including holiday and sickness pay
It is a lesser known IR35 rule, but a very important one in the view of HMRC. The client must allow the interim manager to substitute themselves with someone else. Interims might not do this much in practice, but assignment contracts need to include a valid substitution clause to stay outside of IR35.
Clients have the right to say no to substitutes that are not suitably qualified, but personal fit is not reasonable grounds for rejection. If personality is a factor, it suggests the interim is being hired for their individual qualities (as an employee might be), rather than for their services alone.
If a client provides the interim with a mobile phone, laptop and set of office keys, they are treating them like an employee. Interims should use their own equipment to stay outside of IR35.
Mutuality of obligation
Interims are brought in to do a specific task. Once that task is complete, the interim generally parts from the client and looks for a new assignment elsewhere. If there is any obligation for the interim to be given another project once the first is finished, they are more of an employee than a service provider.
Sometimes, a client will want to keep an interim on to do another project. This is fine, but a new contract needs to be drawn up to keep them outside of IR35.
This blog post is intended as a guide only. Specialist legal advice should be sought for specific cases. The HMRC offers an online tool for assessing the IR35 of contracts here.