The now in force IR35 changes -- Top 10 myths
1. If my public sector client deems my contract to be caught by IR35 from 06.04.17, but previously I had considered it outside, I am automatically caught for earlier years.
Not necessarily, no. The public authority is likely to have made a decision by virtue of the ESS/ IR35 digital tool which may not have taken into account all the status factors that were previously considered and presented a much fuller picture of the working arrangements.
On top of this, HMRC simply does not have the resources to investigate every freelance contractor in the public sector, so they are likely to be much more selective as to those freelancers they wish to take a closer look at pre-6thApril 2017.
2. I have to accept the public authority’s decision that I am caught by IR35.
Limited company freelancers have the right to appeal against a decision. This will require a freelancer making a claim for a repayment of PAYE tax and NIC resulting in HMRC taking up an IR35 check. Here’s how you might want to go about overturning an IR35 decision you disagree with.
3. My company will be liable for PAYE & NIC arrears in the event of the public authority making the wrong decision.
The new legislation provides for a transfer of obligations from the 'fee-payer' to elsewhere in the contractual chain but only in limited circumstances, i.e. where the fee-payer is a non-resident, is controlled by the worker or someone connected with them or the worker provides fraudulent information.
As the IR35 decision making process has been taken out of the hands of the worker, then it would be grossly unfair to penalise the worker for a decision they had no influence over.
4. My income will be taxed twice -- once through PAYE & again through corporation tax.
There will be no double taxation. A PSC (Personal Service Company) can pay its worker up to the net amount it receives from the public authority, without any further PAYE or NIC consequences. And, the PSC (in essence the freelancer's limited company) will receive relief for employment income, tax and NIC costs.
5. Use of HMRC’s ESS tool is mandatory.
The IR35 digital tool, known as the Employment Status Service (ESS) is optional, although it’s understood that most public sector bodies will automatically default to its use. HMRC have stated that -- provided the answers given to the questions are accurate -- then they will stand by the decision of the tool.
6. If I am being treated like an employee then I must be entitled to employment rights.
No. There is no direct link between employment rights and employment taxes. The entitlement to employment rights is based on whether an individual (the employee) has an employment contract with an employer.
7. I’ve been contracting to Government Communications Headquarters (GCHQ) prior to 6thApril 2017 and beyond, so the off-payroll rules apply.
The rules only apply to those public authorities for the purposes of the Freedom of Information Act 2000 and Freedom of Information (Scotland) Act 2002. GCHQ (along with other security and intelligence agencies) is not subject to the Act.
8. I have no right of substitution, so I must be caught by IR35.
While the personal service test appears prominently in the ESS/ IR35 digital tool, answering ‘no’ to a right of substitution does not automatically place a freelance contractor inside IR35, as the tool then moves to a series of questions regarding the right of control. Positive answers to these along with other employment status factors, can still place a contract outside IR35.
9. Given the fee payer is responsible for operating PAYE, my company doesn’t have to be concerned about RTI reporting.
The PSC’s obligations to report employment tax and NIC are largely the same as for deemed employment income. However, any amount of employment income paid that has been subject to a deduction of tax and NIC in this way should be recorded on a Full Payment Submission (FPS) as non-taxable income, with the gross taxable employment income recorded reduced accordingly.
10. My company is working on a specific project that I am fully responsible for, with low level interaction with the public authority client. The services are therefore contracted-out services and, as such, outside the scope of the off-payroll rules.
For the legislation to apply it requires that the worker provides their services personally to the public sector client. This condition is therefore met if a sole director is the only person providing the services, meaning it cannot be considered as contracted-out services.
Debunking the myths for FreelanceUK was Andy Vessey of Qdos Contractor, an IR35 status advisory.