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IR35

Boris Johnson and the Conservative Party won the 12th December pivotal election by a considerable majority and, as in the aftermath of every general election, the media has flooded the internet with speculation on what the country is in for over the next four years. It’s highly likely that the 5 million or so self-employed people currently in the UK contributed heavily towards the Tory win, so what might our flexible workforce expect from Johnson’s government? We take a look at two critical contractor concerns: the IR35 reform and Brexit.


Conservatives promised a review of IR35 – will it happen?

The Tories are traditionally known as the ‘business party’, though their recent reform to IR35 saw that status somewhat tarnished. When other major parties – namely the LibDems and Labour – pledged to review IR35 in the final week of campaigning, many contractors were disappointed that the Conservatives were not readily jumping aboard the bandwagon to retain a large portion of their usual support. They finally caught on, however, and used BBC Radio 4’s Moneybox (which you can listen to here) as a stage to make their promises about the off-payroll rules.

Sajid Javid promises an IR35 review

Chancellor Sajid Javid said the anticipated private sector IR35 changes would be reviewed should the Tories retain their government, and that he wanted to ensure the reforms were ‘appropriate’ before being rolled out.

Despite reassuring listeners that the Conservatives were batting for the self-employed, Javid didn’t sound too committed when pressed for an answer on if the Tories would consider scrapping the off-payroll rules altogether. He instead asserted that the legislation would be included as part of a ‘wider investigation’, as promised in the Tory manifesto, that will ‘look into how new policies could help freelancers’.

“One thing, in particular, I want to look at is the proposed changes to IR35, these are the tax rules that apply to many self-employed people, particularly those that work as consultants,” Javid said while speaking to Moneybox host Paul Lewis. “I want to make sure that the proposed changes are right to take forward so we will be having a review of those proposals and changes as part of our wider self-employment review.”

Will IR35 review be announced quick enough by Tory government to make a difference? 

The potential for a backlash felt by contractors has been overlooked with these hasty, vague promises of an off-payroll review, however.

Preparing for the IR35 reform calls for planning, communication, and a fair amount of time if the correct approach is taken. A change to the legislation this close to the deadline could not only waste business owners’ money but could cause mass blanketing of status determinations as seen in the last-minute 2017 public sector reform. Financial-sector corporations have already beaten a path for rash reactions to the off-payroll rules that other companies wouldn’t find difficult to follow - in fact, GSK joined the ranks of IR35 risk-aversion just yesterday after months of speculation.

This promised IR35 legislative review, if genuine, will have to be turned around at breakneck speed to be completed before the 6th April 2020 rollout date, which has been set since 2018. With the 2019 Autumn Budget cancelled and the Spring Statement too close to the deadline to hold any meaningful IR35 changes, the Tories will have to announce something well before the end of January to give businesses and contractors enough time to prepare.  


How might Boris’ Brexit affect UK contractors?

The fact is that nothing is certain at the moment, including how contractors will be affected by the plethora of avenues the Brexit deal-or-no-deal game could go down. What we do know is that the implications could be far-reaching, whichever way the relationship with the EU swings.

Contractors working in the EU may be impacted by a Conservative hard Brexit 

Nearly 45,000 contractors that live and pay taxes in the UK work mostly in the EU on long-term contracts, while thousands more rely on short-term jobs or commute. The likelihood that these contractors will enjoy the same flexibility of work between the UK and the EU isn’t high; after all, they’re only eligible to work in Europe because Britain is a part of the EU.

If a deal is achieved, a transition period is specified in the withdrawal agreement that allows businesses and individuals to make arrangements until a given deadline – currently, 31st December 2020. Contractors will still reap the benefits of free movement during this time to complete long-term jobs and get future UK-based work lined up.

However, this won’t stand if we exit sans-deal. It would most likely impact tariffs on trade severely and would throw the rights of British workers in the EU (and EU workers in Britain) into uncertainty. With no trade agreements in place, the UK would probably have to rely on the World Trade Organisation rules until new trade deals are forged. Europe-based contractors may have to return to Britain permanently if this is the case.

UK contractor demand may grow under Boris' proposed Brexit

Once again, it’s unclear whether the UK will remain in the single market and how either eventuality will reflect in trade and service prices.

However, within the UK itself, the self-employed added almost £300 billion into the economy over the last 12 months. This is a great indication of how in-demand contractors are and that abundance of work isn’t likely to diminish, at least for now. Employers will probably not want to invest in permanent hires with so much market uncertainty, leading to the use of contractors instead. New projects, system updates and business consultancy will still go on, presenting a wealth of opportunities for the self-employed.

Conversely, this doesn’t spell mass-dismissal for contractors as soon as the post-Brexit dust settles; rather, it could change the landscape of the UK job market as we know it. Self-employment is already on the rise, despite IR35 - Brexit could simply present a catalyst for the inevitable.


Contracting has survived IR35 and Brexit so far under Conservative rule

All in all, it's a case of wait-and-see. Contractors are tenacious though and have survived - even thrived, with self-employed numbers growing year on year - so far despite the IR35 reform and the will-they-wont-they Brexit negotiations.

If you're concerned about IR35, many companies offer a range of contract and working practices reviews.You can find out which option would be best for you below.

 


I’m a contractor: what IR35 contract review is right for me?

When you work for yourself, there’s a lot to think about. Between meeting deadlines, juggling clients and ensuring you get paid on time, there’s also staying up to date with any governmental changes that could affect your business. With the private sector IR35 reform just on the horizon – April 2020 is less than a year away – and the public sector already feeling the effects of the legislative overhaul, it’s important that you, as a contractor, are prepared.

Perhaps you know you should get a contract review and look at some business insurances, but you're not sure exactly what products you need. Maybe you don't even know where to start. Either way, our guide will help to untangle the IR35 review and insurance options on offer so you can make the best choice for your business. 


IR35 Contract Reviews

The importance of having your contracts reviewed from an IR35 perspective cannot be underestimated. When HMRC decide to open an enquiry in to the IR35 status of a contractor, the contract(s) in question will be requested and reviewed, along with liaising with the end client(s) to ensure that the working practices mirror the written terms.

Being able to evidence your status and provide this to HMRC with the necessary documentation, evidencing that you have taken proactive action to ensure you are outside of IR35 will greatly aid the defence of the case, which itself can a very stressful time.  Once the contract has been reviewed an opinion is provided as to if it is a pass or fail.

One of the most common suggestions across IR35 forums and guides to help you stay on the right side of the taxman is to get a contract review. Contract reviews are excellent at helping you understand where you fit into IR35 and what, if anything, you need to change to stay clear of the legislation. However, there is a plethora of review options to choose from – which one do you need?

IR35 Contract Review – Assessment

An IR35 Contract Review - Assessment covers off the key points in your contract that relate to IR35. An IR35 consultancy team will search for clauses most likely to come under fire – for example, whether you have a personal service (or substitution) clause, whether your engager has any control over the way you do your work, or whether there are any signs of you being obliged to provide continuous services to your client. The consultancy team will then provide a pass or fail based on the three key employment status determination tests and give pointers as to how to improve any problem areas.

This is a great option for those that are confident that they’re not inside IR35 but are required to have a contract review to take out IR35 insurance, or have been asked to have a review by their accountant.

IR35 Contract Review – Full

An IR35 Contract Review – Full is a deep dive into your contract. An IR35 consultancy team will thoroughly read every clause in light of IR35 and will pull out any potential issues in regards to the three status tests to provide a comprehensive list of improvements that need to be made, including wording change suggestions. You’ll get the same essential pass or fail result from both the Assessment and Full review, but the latter option offers more detailed explanations and covers every element of your contract.

This is the best choice for those that are confused over IR35, are genuinely concerned about their employment status, or want as much detail as possible in any contract feedback.

IR35 Contract Review – Refresher

An IR35 Contract Review - Refresher is a good option for those that have already had a contract review, but have had minor changes made to their contract. This will offer the same quality of feedback as an Assessment review but will concentrate on the newest or edited clauses in your contract only. It’s also often the cheapest contract review option offered, but you do have to have had either a Full review or Assessment with the consultancy team previously.

IR35 Contract Review – Convert

The IR35 Contract Review - Convert, is designed specifically for those that have just become self-employed. It offers the same level of detail in the pass/fail feedback as the Assessment contract review, but is accompanied by an introduction to IR35 and extra information regarding the legislation itself.

IR35 Working Practices Review

A contract should mirror the actual working practices you and your business undertake when engaging with the end client.  However, the ‘true’ contract is not the written one but the one that the review of the working practices reveals.  This holds vast credence with HMRC during an IR35 status enquiry, as HMRC view the working practices as your actual working relationship with the end client.  During an IR35 status enquiry HRMC will contact your end client(s) and ask them about what did transpire and what could transpire if a situation arose around the terms of the contract, therefore ensuring that your working practices match the terms of your contract is essential in establishing your IR35 status – there is no fooling HMRC.  

HMRC will attempt to establish if the relationship between you and the end client is disguised employment or not, so it is crucial that you are in business in your own right and can demonstrate that you provide your services to them with the autonomy any normal business would.  However, the written contract between you and the end client might be perfect from an IR35 perspective, being exemplary in demonstrating key clauses such as substitution, mutuality of obligation, non-exclusivity and control, but unless it can be proved what would happen in reality it is worth very little in defence of your case.  This is where the working practices review comes in, and can be backed up by the Confirmation of Arrangements document.

The IR35 Working Practices Review is a different product to the contract reviews, but often accompanies them. Instead of submitting your contract, you instead fill out a questionnaire of around 30-50 questions (depending on your responses at certain stages) that examine your day to day work life, how you do business with your clients, and whether you behave as a contractor should in a workplace.

While contract reviews are widely encouraged, it’s actually your working practices and client relationship that HMRC will put under the microscope in the event of an IR35 investigation. If you’re worried about your employment status, or have clients that are concerned with where you fall in the off-payroll rules, it’s advisable to double up with a Working Practices review.


Additional Contractor Business Insurances

While all contractors should seriously consider having their contract reviewed, protecting yourself against the off-payroll working rules isn’t the be-all of business insurance. If you’re self-employed, there’s a wealth of risk you have to face. No matter how small the chance, just one claim from a client could bankrupt a small contractor.


So what business insurances do contractors need?

Professional Indemnity

Professional Indemnity insurance, often referred to as PI, is one of the fundamental insurances for contractors. PI protects you and your business should your client allege that you’ve made an error or omission in your services. This can include inadequate advice given, negligence, or flawed designs. It also covers legal expenses when defending the claim, or any compensation needed to fix the problem.

PI protection is particularly important for professions that handle personal or financial data, or who’s designs or advice could have significant monetary repercussions if they’re not up to industry standard. Accountants, business consultants, chartered surveyors, and IT contractors are all high-risk when it comes to PI.

Public (& Employers) Liability

Public Liability (PL) insurance covers the cost of a claim made by someone – client or member of the public - who has suffered injury or property damage as a result of work you’ve done. PL covers the ‘physical’ damage caused by a mistake. Whether you’re at fault as the contractor can depend on the amount of time passed and how the client’s maintained the work done, but proving liability can still result in a costly trial.

All contractors should consider having a minimum amount of PL cover, but those working in manual professions especially - like construction and the energy sector - will almost certainly need it. The amount of PL insurance you need will most likely be stated as part of your client contract.

It’s also worth bearing in mind that while PL isn’t required legally, Employer’s Liability (EL) insurance is - provided that you have two or more people in your company. EL cover pays for compensation costs and legal fees if an employee, or ex-employee, sues for illness or injury caused by their work.

IR35 Tax Investigation Insurance

IR35 Tax Investigation insurance protects you from the potentially devastating effects of a tax investigation carried out by HMRC. IR35 has been reformed to challenge possible avoidance of tax and NI contributions. In particular, HMRC is looking for so-called ‘disguised employees’ who gain and carry out work via partnerships and limited companies. This makes freelancers and contractors prime targets for investigation.

If you find yourself being investigated under IR35, HMRC will ask you to prove that you’re NOT an employee. This can mean extensive court fees and loss of work while the investigation is carried out. This is what the IR35 insurance protects against. As part of some policies, you’ll also be provided with a tax and IR35 expert as defence should you have to go to trial which could prove pivotal for winning your case.


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Source: Hannah Robinson - www.larsenhowie.co.uk

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