We all get confused when it comes to talking about IR35. At Project Partners, we call it the ‘IR35 Hokey-Cokey’ because, in its history how many times have the rules changed? About as many as our prime ministers! So, Stuart and Matthew put together a presentation to help you to navigate the ever-changing world of IR35.
The background of IR35
The inception of IR35
IR35 has been around since 2000, although most people only became familiar with it once it started hitting the end clients and agencies in 2017. Before 2017, it was always the contractor’s responsibility to deal with IR35. It never travelled up the supply chain and therefore agencies and end clients didn’t care about it because it didn’t directly affect them.
However, once 2017 rolled around, HMRC decided that the old system wasn’t working. One of the reasons for this was that of the third of contractors that should be inside of IR35, 90% of that third were not paying themselves the correct level of tax. There were also a couple of other indicators that may have forced HMRC to have to change it but change it they did.
The public sector legislation changes
So as of 2017, they changed the legislation. This was primarily only in the public sector. It was no longer the contractor that decided their fate concerning IR3, it then became the end client’s responsibility. That was not a very popular move. (I think you could probably summarise the entirety of IR35’s history using that phrase actually: not very popular.)
At the time, there was an exodus of contractors from the public to the private sector. At the time HMRC had said there were no plans for it to come into the private sector. (Spoilers: it did.) The legislation was changed so that the end client bears the liability for a determination. This is then passed on to the fee-paying entity: which is the company that pays the contractor.
There was a lot of confusion at that time because there weren’t any tools out there to help people determine their status. That is where CEST (Check Employment Status Tax) was supposed to come in. CEST is HMRC’s online tool, but unfortunately, it’s not very good. In credit to HMRC, they have improved it over the last couple of years, but we still wouldn’t recommend using it.
Private sector reform
It was then that private sector reform came about. It was originally slated for 2020, but due to complications caused by the COVID-19 pandemic, it was delayed, to be introduced in 2021 instead. Realistically, the delay was advantageous to a lot of people. Even in 2021, many end clients and agencies were not ready for IR35. However, in the elapsed time between its original and actual introduction dates, a number more tools for aiding companies with IR35 came onto the market, including the tool that Kingsbridge developed. Ultimately, these extra resources meant that businesses were better prepared to deal with IR35 when it was finally introduced.
The key changes to IR35 legislation
- There was a requirement for an SDS (Status Determination Statement) to be produced: this would detail why a contractor is inside or outside of IR35 and the reasons for it.
- A dispute resolution process was added. If the client, the contractor or the fee-payer disagrees with the determination that was given, they have the means to appeal against it. Unfortunately, this is a client lead dispute resolution process, so if the client continues to disagree with your assessment, there’s not a lot you can do outside of that.
- To whom does IR35 apply? If you work in the public sector, the determination is very straightforward. It only applies to people who are subject to the Freedom of Information act, so most of your government bodies, HMRC themselves, NHS, and DEFRA… they’ll all be subject to the new IR35 rules. Whereas GCHQ, and its new top-secret organisations, wouldn’t because they’re not subject to the Freedom of Information Act.
However, that definition would not work for the private sector. Therefore, HMRC limited it to medium or large-sized companies as per the Companies Act, which has been so for two successive financial years. They also added in an exclusion, whereby an entirely international company that has no UK permanent establishment: if they are the end client receiving the services, don’t have to deal with IR35.
The most recent changes to IR35
The first U-turn
The previously discussed changes to IR35 were consistent for the last year or so, until the advent of the mini-budget, which blindsided everybody regarding IR35. It was expected to, potentially, have something mentioning IR35 in the footnotes of the budget, because, ultimately, there is always something about IR35 in there. (Although, strangely enough, it’s not been mentioned in the most recent budget announcement) but then the mini-budget came out and they said they were scrapping the last five years of IR35. So, everything after 2017 was removed.
U-turn number two
However, a week later, that U-turn was U-turned. This meant that the rules surrounding IR35 went back to exactly where they started before the budget. As you can imagine, that has left an awful lot of people extremely confused about where they stand regarding IR35.
IR35 is not going anywhere. The current process of dealing with IR35, where the end clients take responsibility and the fee-payers deal with it, is staying. To be very clear, there is a chance, in the future, that they might revisit it but, for the time being, do not assume it’s going anywhere. Because, if companies start dropping processes around IR35, they’re going to leave themselves in a heap of trouble.
Some background on Kingsbridge and the Kingsbridge tool
Kingsbridge: a history
Historically, Kingsbridge Contractor Insurances was born in 2007. Their primary focus is insuring limited company contractors for their professional indemnity. They also deal with public liability insurance covering multiple sectors across banking and finance, oil and gas etc.
On the run-up to the private sector changes around IR35, Kingsbridge had a 50,000-strong contractor book. Unfortunately, IR35 and the changes that came into the private sector, it was detrimental to their business. Ultimately, they needed to have a strategy in place, to support our partners across the supply chain, and to ensure that when the legislation came into effect that they had a plan. They needed a strategy and something which would provide a robust solution to the market which could give everybody as much confidence as they possibly could. Unfortunately, IR35 is a subjective piece of legislation. There is no silver bullet. However, if there is something that Kingsbridge can do to provide confidence then that is their key driver and message. Having said that, Kingsbridge brought in several businesses, including Larsen Howie.
Larsen Howie was essentially a status review company with insurance on the side, so the reverse of what Kingsbridge was at the time. Kingsbridge saw the need to have expertise about IR35 after 2017, so they merged Larsen Howie into Kingsbridge, and then we were fully merged in 2020.
The Kingsbridge tool
With them, Larsen Howie bought version 1 of the IR35 review tool. It was a very manual process, and very labour-intensive. But it was there to help agencies, clients and contractors determine their IR35 status. Regrettably, IR35 is not a well-understood piece of legislation. It is extremely niche. But there is, perhaps unfairly, an expectation from HMRC that people understand IR35. Therefore, Kingsbridge was focused on doing things like training sessions and implementing the tool.
In 2020, Kingsbridge then acquired its IR35 status tool. That was originally known as IR35.io and was rebranded as the ‘Kingsbridge status tool’. That, functionally, is a system that took the manual processes that were necessary back at Larsen Howie with version 1 and automated them. This meant that the easy inside and easy outside (so, inside being caught by the legislation, outside is not caught by the legislation) were dealt with automatically by the tool.
Kingsbridge vs CEST
Whereas, Kingsbridge still had to deal with that complex middle ground that CEST does not help with. It is comprising 21% of all instances from HMRC zone data that CEST cannot give a definitive result. Those borderline cases in the middle, in the Kingsbridge tool, will get sent to their in-house teams. They’ll look at the individual circumstances, ask additional questions, and then drive to an inside or outside result. This means that everyone can better understand why the result is what it is. This will then help them in the future.
The pitfalls of the U-turns
The first U-turn
Going back slightly to the U-turn. It has caused a lot of confusion out there. It’s safe to say that when the U-turn was announced (the first U-turn: about HMRC scrapping the last five years of IR35) a lot of contractors were very happy with it. They felt everything was better back when their IR35 determination was in their own hands. A lot of agencies were also happy because they no longer carried the liability and had to deal with IR35 when it was the client who made the ultimate decision. And a lot of clients were happy because it meant that they could start recruiting contractors again.
Broadly, it could be said that the IR35 U-turn was probably the best aspect of that mini-budge. It’s fair to say that the changes since 2017 have not been good. Then unhelpfully, about a week later, the government cancelled everything that had been announced in the mini-budget.
The second U-turn
In that week, before the second U-turn, Kingsbridge had several clients who contacted them. They cancelled their involvement with the tool on the basis that they didn’t need it anymore. This was a very dangerous position to be in. Crucially, even if the government had chosen to cancel the IR35 legislation, cancelled the changes and moved everything back, as of April, to the rules before 2017, HMRC was still going to want to see evidence of compliance and due diligence. Companies must be able to substantiate that they have taken reasonable care in keeping the determination. If the first thing that HMRC see is that a business chose to immediately cease engaging with IR35, that is going to send a very negative message should HMRC investigate.
Working with IR35 legislation
Kingsbridge’s advice going forward is to keep on doing the assessments. Even if HMRC had decided to go ahead with the first U-turn, until we had reached April 6th, when the changes would have been implemented, it would have been our position to assume that everything still could revert to where it was.
Realistically, it’s unlikely that they’re going to scrap IR35 anytime soon, or at least the chapter 10 aspect of IR35. But the government has shown their hand in that they are aware of IR35, they’re aware it’s not perfect. Ultimately, it’s an easy vote-winner if they were to scrap it because it would appease all contractors out there, all agencies and a lot of end clients. Having said that, until they announce something, and until that gets put into place, we would advise businesses to keep on doing the process as you already have done. Or, if you haven’t got a process in place, do so. HMRC will not take ignorance as an excuse when it comes to IR35.
Confidently engaging with contractors
The difficulties of IR35 and contractors
Several end clients out there will only engage with contractors inside of IR35. This is in hopes of saving themselves from the difficulty of determination. This is costing them the ability to engage talent. There are a fair number of high-flying contractors out there, the best in their market, that don’t want to work inside of IR35. It reduces their potential earnings: they’ll end up paying more tax than they think is reasonable.
This means that, on the reverse, there are a lot of contractors out there who will refuse to work on a contract unless it is outside IR35. Therefore, as a company, by saying you will not be working with contractors unless they are under the umbrella, you’re significantly limiting your pool of talent.
Engaging with contractors in the future
It is perfectly possible to work with contractors, with IR35. It’s not some unknowable beast. There are plenty of people, Kingsbridge included, that can help you deal with IR35. Whether that be by way of consultancy, or by way of using a tool, contract reviews et cetera, there is a whole ream of things that you can do out there. Ideally, take a holistic view of where you as an organisation are. Look at yourselves concerning IR35, then look to implement a system that works for you and your needs. That could be as little as doing it in-house and using CEST, with consultancy on the side. Or, fully investing in something like the Kingsbridge status tool, which will help automate the process a little bit, for you.
- Don’t be afraid of IR35.
- Engage with a specialist who knows what they’re talking about.
- Find solutions that work for you.
- There is always insurance that will cover any potential liability for anybody in the contractual chain.
Benefits of getting IR35 right
- Access to the best talent contractors wanting the roles that are going to be outside IR35, that’s a huge area to take notice of.
- The advantage over competitors. Some end-clients are out there, they’re engaging with contractors providing that there’s confidence within that process.
- Reduced overheads. Of course, with those inflated day rates, people are shifting over to PAYE. That has seen an increase in costs for those businesses.
- The requirement to have a contingent workforce. That’s always something which has grown, it’s vital to the economy, and something which is going to continue to grow as we continue.
The full session can be viewed here.
Slides from the presentation are available here.