We held a Q&A with
Andy Vessey- Head of Tax at Kingsbridge. He shares his knowledgeable answers
to some commonly asked and extremely important questions regarding the
impending IR35 reform.
What can contractors do to prepare for the reform?
As we know it is only going to affect contractors who are contracting
for medium to large companies and essentially the status determinations are
going to be taken out of their hands. However, there are still things you can
do as a contractor.
It is highly recommended that the contractor has a dialogue
with the end client and asks the end client if they are going to allow the
contractor to participate in the process of determining their status. End-clients
should engage in this dialogue; however, a number of end-clients currently
aren’t engaging with contractors re. their status. Holding discussions with
workers now should help minimise potential future dispute resolutions going
forward.
If as a contractor you are denied the dialogue with the end
client, it is recommended to have your contract and working practises independently
reviewed by an accountant or company like Kingsbridge so you can prepare to
challenge any ‘inside’ IR35 determination that you & your adviser disagree
with.
Do you have any advice for contractors who have received
their determination?
If you have an outside determination- then that’s great and
there isn’t much you need to do.
If you have an inside determination this is where problems
can occur. You need to decide if you are going to accept it or if are you going
to dispute it. If you accept it, you need to establish whether you are going to
be permitted to use your own PSC or if you are required to go PAYE or Umbrella.
If you decide to go down the agency or Umbrella route, you then need to
determine if you are going to accept current rates or are you going to seek
increased rates to compensate for tax and NI reductions.
If you are going to accept an inside determination and still
be permitted to use your own PSC, your PSC essentially becomes redundant
because you’ll have PAYE tax and NIC deduction so seems illogical to keep the
company open and pay admin costs. However, that advice would only apply if you
have a contract that is likely to exceed 2 years. If you are only going to be
working for the end-client for a year on an inside determination, then you may
want to keep the company open in case you start any contracts in the future
that are outside IR35. If your determination is inside and your contract will
exceed 2 years, you may want to consider closing the company and taking out the
remaining money as capital and therefore more tax efficiently and operating
through an umbrella or agency PAYE. However, the problem occurs if the contract
only lasts 18 months and you start up another company carrying out a similar or
identical trade before the 2 years has elapsed, the distributions legislation
allows HMRC to go back and tax you on the previous capital gains as dividends
where the main purpose, or one of the main purposes of the winding up is to
obtain a tax advantage
If you decide to disagree with the determination, I would highly recommend taking advice
from independent advisors. You can then offer a reconsideration if necessary.
What are
your thoughts on the use of CEST?
The problem
with CEST is that it is a ‘one size fits all’ tool and is not industry specific.
I personally would not recommend relying on it as I don’t believe you can fully
automate the employment status process due to the subjective nature of some of
the employment status tests. Although automation does have its place, but only
for the initial process. Behind that should be an element of human interaction
where people who are experts are able to drill down and look at the whole
picture to fully assess and make a judgement, which CEST cannot do as it is an
automated tool.
What is
your advice to clients who are still waiting for the budget/ legislation to
come through before making final decisions?
I would not
recommend suspending any action on this. Although the government have suggested
they are reviewing the legislation, you cannot assume anything else until they
have announced if so. If end clients are relying on there being a delay, it can
lead to their hands being tied and if clients delay action until the review, they
are in a situation where they are rushed to prepare for 6th April which
can lead to making hurried decisions and mistakes being made. This can
ultimately result in the process being more costly due to lack of preparation.
My advice is to accept it now and get on with it.
If the contractor has a concern
regarding historical status where they have self-assessed as outside of IR35, will
HMRC look back retrospectively?
Initially
HMRC said they wouldn’t look back at historical events, and then changed this
to deciding that they will look back historically if they suspect fraud.
Contractors need to be prepared to be investigated historically but what they
could do is enter into a dialogue with the end client to discuss if HMRC does
come along and say their contracts are inside IR35, will the client support
them and help them decide the contractors status. If the client is prepared to
do that, the contractor can draft a working practice statement that both
parties can sign off. However, if there have not been any changes in working
practices in contractual arrangements pre and post 6th April, how is
the client going to respond to that if they’ve made a determination on 6th
April that the contractor is inside, surely logic dictates that extends
backwards which can present problems.
How do you
believe the economy will be affected post 6th April?
This is hard
to predict, and only time will tell. Obviously medium and large sized companies
are reliant on a flexible working force, certainly for the higher skilled
workers if they are going to be treated like big companies like GSK and Lloyds by being forced down a PAYE route, I
think that will force these contractors to demand higher rates which will cost
companies or drive them into competitors or ultimately drive them overseas. We
saw a threat of this when the NHS made blanket determinations and a
number of consultants threatened to move to Dubai or Germany.
Click here to visit our IR35 hub
for more information on IR35 and the impending reform.
