What to consider when it all goes wrong with IR35

IR35 is a hot topic in the public sector at the moment. The legislation has been refreshed to apply to all Limited Company PSCs (Personal Service Company) working in the public sector (this applies to approximately 26,000 individuals). IR35 was introduced in April 2000, to counter tax and NI avoidance by individuals using limited companies to provide their services. The recent IR35 refresh for the public sector has led to much confusion.

Here are our 7 key facts to help dispel some of the myths (in no particular order):

 

1. Contract Clauses

Many contractors believe that their contracts contain clauses which mean they technically fall outside of IR35. For example; “where the named contractor is unavailable, a replacement will be provided” this is used by many agencies to try and circumvent IR35, however this isn’t he sole criteria on which IR35 compliance is assessed. There are many more clauses around work practices that need to be considered, these are covered in the next 6 points.

 

2. Limited Company PSCs

PSCs (Personal Service Companies) are single person limited companies providing a service through an intermediary (Limited Company). These are being targeted by the HMRC, as these are usually contracted to clients without a defined scope or predefined deliverables / timescales.

 

3. Legitimate Limited Company

Companies providing a service for a specific initiative / project, with a defined scope and associated milestones / payment profiles. This is usually accompanied by a Statement of Works and any changes of scope will be subject to approval and may be subject to additional charge.

 

4. Equipment Usage

It is important that you use your own equipment (laptop, phone, email) unless specifically required to use devices within the clients network in order to comply with the clients Information Governance Policy.

 

5. MOO – Supervision / Direction

MOO (Mutuality of Obligation) essentially means that scope of work is clearly and explicitly defined before you start working with the client. Put simply, you should not accept adhoc tasks requested by the client. Any requests outside of the original scope should be packaged and priced separately.

 

6. Umbrella Companies

An Umbrella Company is essentially a middle man between you and the client. It is not possible to work through an umbrella company as a limited company, you would act as an employee and pay NI / PAYE tax. The umbrella company will also charge a nominal weekly / monthly fee. The benefit of working through an umbrella company is that you would not fall within IR35 which means that if you previously had a limited company, you’d be less likely to be investigated for back taxes and NI contributions.

 

7. Liability / Risk – Back Taxes and NI

If you continue to work as a PSC and fall within IR35; you will have to make changes to your working / contractual agreements before April 1st 2017. If you do not, you are at major risk of being investigated by HMRC who have identified over 26,000 limited company contractors who potentially fall within IR35. An investigation could lead to you being forced to pay HMRC anywhere from 20%-40% (due to “unpaid” PAYE and NI) of what you have earned since establishing your PSC.
 

Useful Links:

HMRC Employment Status Tool

 

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