With the recent changes to IR35 in the public sector it is even more important for contractors and their accountants to understand IR35, what it means for them and what their options are.
From 6 April 2017, for contractors providing services in the public sector, it is the end client/agency who determines whether an engagement falls within IR35 rather than the contractors.
This change represents a significant administration burden on the end client/agency. As such we have seen many entities engaging contractors adopting an ‘all within IR35’ approach.
Such an approach is not believed to be sustainable in the long run with consequences, for example: being contractors seeking work outside of the public sector, leaving the public sector with a shortage of skilled contractors; or contractors demanding higher fees to compensate for the reduction in take home pay.
Despite the fact the final decision in respect of IR35 status has been taken out of the contractors’ hands, we believe it remains important for contractors to assess their IR35 status. Having written contracts reviewed for IR35, or ensuring there is a written contract in place setting out the agreed terms and conditions, should still be an essential piece of due diligence undertaken by the contractor.
There are several reasons for this, not least, because an IR35 contract review undertaken by an expert could be the evidence an end client/agency needs to change its view. Indeed, HMRC’s guidance states that one of the contractors’ obligations is to assist the end client/agency to determine its IR35 status.
Other reasons for contractors continuing to undertake due diligence are:
(1) if you are working on a contract with a client pre-6 April 2017 and either that contract continues beyond that date, or you enter into a new contract with the same end client who treats you as within IR35, there is a potential risk of HMRC opening an IR35 enquiry into the contractor’s company for the period prior to 6 April 2017. Under normal time limits HMRC can look back four years. As such the potential liability for your company can be significant. By having the written contract reviewed now, you can assess/mitigate your risk;
(2) The legislation that came into effect on 6 April 2017, also gives the contractor the right to make a ‘repayment claim’ to HMRC if they believe they have been taxed incorrectly. This is a far cry from the ‘appeal’ that was alluded to in the consultation document, and should not be contemplated without expert advice given the potential risks, however, having an expert undertake an IR35 review may assist in a favourable outcome if this is an avenue you wish to pursue.