IR35 Q&A with industry expert Andy Vessey
Our in-house IR35 expert, Olivia Graham held a Q&A with Andy Vessey- Head of Tax at Larsen Howie. 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 Larsen Howie 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.
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