IR35 changes for the private sector

UPDATED AS OF 18 MARCH 2020

Stephen Barclay Chief Secretary to the Treasury announced that the IR35 changes to the private sector which were to be introduced in April 2020 will now be delayed for another year and become effective from April 2021

From April 2021 onwards the new IR35 changes for the private sector are due to take effect. There continues to be misconception, similar to when changes to IR35 were introduced for the public sector several years ago.

Perhaps the most important point to make is that the underlying principles of IR35 will remain unchanged. What is changing from April 2021 is who is responsible for determining whether an engagement is inside or outside of IR35. 

Therefore if you are currently working in a role that is deemed to be outside of the IR35 legislation this should continue to be the case after April 2021.

The main principles of the IR35 legislation

IR35 will now come into effect on 6 April 2021 and was introduced to tackle those individuals who were providing their services via a limited company (known as a ‘personal service company’) in circumstances where had the company not existed they would have been taxed as employees.

if HM Revenue decide to investigate your employment status, they will speak both with the contractor (you) and the engager (your client). They will also examine the contract as well as ensuring working practices mirror the contract. 

Therefore having both a robust contract and making sure that your actual working arrangements match the contract are equally important.

What exactly will HM Revenue examine in particular?

HM Revenue's policy is to look at the situation in the round, though the three key areas they tend to focus on are follows:

Substitution

This is one of the main areas looked at when determining the true relationship between a contractor and engager (for ‘engager’ read your client). 

A contractor should provide a service rather than their own personal skills and expertise. 

This is often defined as an employee relationship which involves a contract of service whilst a contractor (or self-employed) relationship involves a contract for services. This means that the contract should allow the contractor/freelancer to provide for someone else to do the work i.e. they should be allowed to substitute their services with those of a suitable replacement. 

This is fundamentally different from the relationship between an employer and employee where the employee is expected to provide their services and would not be allowed to send someone else to do their job! 

Therefore, if the contract allows for substitution and you are able to substitute your services occasionally with another contractor, then this will be very strong evidence of a contractor/client arrangement, rather than an employee/employer relationship. 

However the reality is, that it can often prove difficult for contractors to demonstrate in practice as they will rarely, if ever, bring anyone else in to do their work. Although, even if you are not able to appoint a substitute, if you have a genuine right to provide the client with a substitute to undertake the work, then this is very strong prima facie evidence that the contract is not caught by IR35. 

If your client retains a right to say no to a substitution, this should only be on the basis that any substitute lacks the necessary skills and experience or on other reasonable grounds.

Mutuality of obligation

Mutuality of obligation is a legal term which looks at whether the engager has an obligation to provide the contractor with work and whether the contractor has an obligation to accept any work offered by the engager.

Where this is established by HM Revenue, the relationship will be deemed to be one of employer and employee.

In terms of the contractor/engager relationship, it’s important that the contract relates to a specific project and there is no obligation placed on the engager to provide further work once the contract is complete and there is no obligation on the contractor to accept any further work. It is also good practice for the contract to have a notice period of one month or less as well as the contractor and engager both having the ability to terminate the contract early

Where a contract is a ‘rolling’ contract or is performed over a longer period of time, HMRC could try to argue that the contractor is actually an employee.

Control

This is another key area which is reviewed when determining the nature of a relationship between engager and contractor.

The less control the engager has over the working arrangements of the contractor or freelancer, the better – they are more likely to be viewed as a contractor rather than employee

Some of the other areas HM Revenue will look at when determining the true nature of the working relationship are as follows:

What private sector organisations do the new rules apply to?

When they are eventually introduced, the new rules will be applied to “large and medium businesses”. An estimated 1.5 million of the smallest businesses will therefore be excluded from these changes

What's the definition of a 'small business'?

HM Revenue have stated intend to use the existing statutory definition within the Companies Act to determine whether or not a corporate client is small.

Therefore, a private sector organisation will be defined as 'small' if the qualifying conditions are met by the company. It will need to satisfy two or more of the following requirements to be regarded as 'small' and not caught by the new regulations:

Preparing for the IR35 changes

Regardless of whether you are currently working for a small business. it might be prudent to reevaluate the existing working relationship with your client ahead of these changes.

You can examine your current contract and see what freedom it allows for you to pursue work outside of your current role. 

You could also look at the level of control your client has over you. For example, do they determine your hours of work and the location where the role is performed?

If you want to maintain your existing working relationship with your client after these changes take effect, it might be a good idea to amend the contract to reduce control and create more flexibility between the two of you.