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Prior to the off-payroll reform in 2017 for the public sector, and 2021 for the private sector, a contractor was solely responsible for assessing their own IR35 status. However, since the off-payroll legislation has been rolled out this has changed.
If a contractor is providing services to a client in the private sector and the client is classed by HMRC as a small company, then the responsibility to assess IR35 status remains with the contractor.
If a contractor is either providing their services in the private sector and the client is classed by HMRC as a medium or large company, or the contractor is providing their services to a client in the public sector, then the responsibility to assess IR35 status rests with the client.
It is also worth noting that the ‘fee-payer’ is responsible for deducting the relevant tax and National Insurance (NI) as well as any other applicable deduction such as the Apprenticeship Levy at source.
Assessing IR35 is not easy as there are no hard and fast rules in place to assist. IR35 is based on key status tests and case precedence built up over a number of decades, which isn’t very helpful at all when starting to learn IR35.
The main three IR35 status tests are;
– Supervision, direction and control
– Substitution
– Mutuality Of Obligation (MOO)
Additional IR35 status tests include; financial risk, integration, and being in business on your own account.
Firstly, it is key to note that every single engagement must be reviewed and considered on its own facts and circumstances, both positive and negative, and on the actual written contract as well as the reality i.e. the working practices. These are then considered in line with the case law to provide an unbiased opinion as to the IR35 status of the engagement.
Once the information is to hand there are a number of different avenues to go down to assess IR35 status, including;
– Having the internal knowledge and capability via staff – existing or new
– Having internally developed software
– Using external professionals for training and/or complete assessments
– Using HMRC’s CEST tool (we wouldn’t recommend this…)
– Using third-party software (we highly recommend the Contractor Compliance Portal)
– A mix of the above.
The process will be almost the same in all instances – in that there will be a series of questions asked that need to be answered, often in a yes/no format to provide clarity of answers. This might be via a paper form to complete, an interview or via a piece of software.
Questions on all the key and additional IR35 status tests should be asked, along with further questions depending on the answers provided so that a full picture is painted of what goes on in reality as well as what should occur contractually, which ideally should match.
The answers provided are then reviewed by the system, human, or both, and produce a result – which can be automated, manual or a mix of the two. At all stages it is crucial that reasonable care is undertaken so not to fall foul of HMRC legislation.
The result will be put into a Status Determination Statement (SDS) document and provided to every entity in the supply chain to ensure the compliance requirements are met. The contractor can appeal the IR35 status decision, which the client then has 45 days to respond to. The client is under no obligation to alter the decision or provide reasoning, just to communicate their decision to the appealing party.
Finally, the SDS along with the information provided and the answers given, as well as any notes, should be retained as evidence incase HMRC come calling in the future.
The IR35 assessment will produce either ‘inside IR35’ i.e. it’s disguised employment and falls foul of IR35 legislation or ‘outside IR35’ i.e. it aligns with IR35 legislation and the contractor is genuinely such.
Where a decision cannot be made further evidence and information must be sought, reviewed and re-reviewed until a firm inside or outside opinion can be provided.
