Inside COMATCH

What You Need to Know about IR35

  • Lukas Römer
  • February 12, 2021

If you are an independent consultant or a freelancer in the UK, there is a good chance you have not been able to avoid the term IR35. In this article, we will provide an overview of what the IR35 legislation is all about, what this means for independent professionals, and what similar laws in other markets look like.

 What is IR35?
IR35 (or off-payroll working) is a word used to describe two sets of tax legislation that are designed to combat tax avoidance in the UK by workers (and the firms hiring them) , who are supplying their services to clients via an intermediary, such as a limited company. This would be a limited company set up by an independent consultant, otherwise known as a personal service company (PSC). The legislation aims to target workers, who would be considered an employee if an intermediary was not used. Such workers are called deemed employees by Her Majesty’s Revenue and Customs (HMRC). If you’re caught by IR35 (or considered to be inside of IR35), income tax and National Insurance Contributions (NICs) must be paid as if the independent consultant were employed. Although the IR35 legislation will apply to private companies on April 6th, it has been relevant for public companies for quite some time.

So, what does that mean? For each engagement an independent professional is working on via a PSC, the end client needs to determine whether the worker will function like an independent contractor (and therefore outside of IR35) or will be more like an employee (or inside IR35). In an inside IR35 case, COMATCH would need to put the independent professional on their payroll, making sure tax and NICs are paid. If you directly source a project with a client, the client will need to make sure that NICs and taxes are deducted from your daily rate.

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A so-called ‘status determination statement’, which indicates if the worker is inside of or outside of IR35, must be provided by the client before the engagement starts for every scenario in which the independent professional and the client fulfil the following criteria:

Independent Professional 

    • Is self employed 
    • Works with an intermediary construct: a limited company (i.e. Personal Service Company) where the indepdent worker is the only employee/shareholders 
    • UK residents 

Clients 

    • Not a small client
      A small client is one which fulfils two of these criteria:
      • Turnover < £10.2 M
      • Balance Sheet Total < £5.1M
      • No. employees < 50
    • Legal entity in the UK

End clients are ultimately responsible for determining the correct status and will also be fined if the status is not determined correctly.

What are the criteria for determining if I am inside or of outside the IR35 legislation?
Before an engagement, clients will need to check if IR35 applies. They will use this set of criteria to determine your status:

    • Control & direction: How much are independent professionals directly supervised by client managers and how much do the independent professionals supervise client employees?
    • Substitution: Are independent professionals able to deploy subcontractors to deliver their work and has that happened in the past?
    • Mutuality of obligation: Can independent professionals expect to have new tasks set up for them after their current assignment without changes to the contract?
    • Provisioning of equipment: Do independent professionals use laptops and other material from the client or are they mostly working with their own equipment?
    • Financial risk: Do independent professionals bear any financial risk with their engagement, for example by making investments that will not be reimbursed?
    • Basis of payments: Is the independent professional’s pay only determined by the time they worked or is it measured by output and milestones?
    • Part & parcel: How much are independent professionals involved in the client’s internal staff meetings and/or social activities?

The more the independent professional is expected to work like an employee, the more likely the status will be determined to be inside of IR35. However, there is no unambiguous way to determine the status, as it will be based on an interpretation of the criteria.

Clients will have the responsibility to determine the status of their workers, but are also prone to financial risk if they determine the status differently than HMRC. Therefore, clients might have a tendency to declare more people inside IR35 than necessary.

It will be your role (and COMATCH’s role) to make sure that status determinations are thoughtfully considered and accurately interpreted.

What is COMATCH’s standpoint on IR35?
As an organization that handles the contracts of independent professionals all over the world daily, we are aware of very similar sets of legislations in other countries. We also see that the criteria, which decides whether someone is considered a deemed employee or not, are very similar across Europe. The difference lies in how these criteria are interpreted by governmental organizations, who are responsible for monitoring such contracts.

In Switzerland, we see that companies and independent professionals are very aware of ‘false self-employment’ and are very strict in how they set up contracts. This leads to many independent professionals paying income tax and national insurance as if they were employed during their consulting engagements. Only very clearly defined projects with scope definitions and milestones within the contracts are handled on a proper B2B basis.

In Germany, there was a change of legislation in 2017 which brought up the topic of ‘false self-employment’ (Scheinselbstständigkeit), mainly to combat tax and insurance avoidance and therefore worker exploitation of parcel delivery companies and cleaning services. By now, almost every client in Germany is aware that they must do status determinations of the freelancers they are engaging to avoid paying large fines for not properly paying tax and insurance contributions for their workers. However, this has almost no effect on the work of the vast majority of projects contracted via COMATCH, even though the criteria are very similar to IR35’s.

To give you more tangible insight, we outlined three typical cases for projects contracted via COMATCH and our estimate of whether these cases might fall inside or outside of IR35.

Case 1: Strategy Consultant

    • Works towards a pre-defined deliverable (e.g. decision making document for market entry)
    • Outsources some work to other companies (e.g. market research)
    • Is mostly working on their own with only regular checkups with client representatives
    • Uses their own equipment and does not necessarily have access to any client software

—>  Definitely outside of IR35

Case 2: Implementation Consultant 

    • Is working towards a goal to implement a pre-defined process / organizational structure / piece of technology
    • Initial scope might be broadened during the project as more information becomes available and reprioritization needs to take place
    • Is interacting with client employees on a regular basis
    • Might have access to company equipment and tools

—>  In most cases outside of IR35

Case 3: Interim Manager 

    • Is filling a pre-defined position at the client organization without a pre-defined scope
    • Might be managing several client employees for the time of the engagement
    • Is usually reporting to senior management or C-level within the client organization
    • Is involved in the company’s infrastructure in terms of technology, equipment, meetings, and social life

—>  Probably inside of IR35

As you can see, the new IR35 legislation is going to rely on interpretation. The increased financial risk for end clients to work with independent professionals and the rather loosely defined rules under which clients and independent professionals can still work together will increase uncertainty.

We suggest that you:

1. Educate yourself on the criteria of determining your status. This will help you to scope projects that are outside of IR35 and will help you advise clients on how to make the right status determination.

2. Check your running engagements and see if any of these might be inside IR35. Talk to your clients about the status determination.

3. Check with your accountant if you must prepare for any additional processes from your side with this new set of legislation.

4. Check what financial impact you will face in case your engagements are considered inside IR35 to make sure you are adjusting your daily rates accordingly.

Further Reading:
Online tool of HMRC to check your status determination (the validity of the tool’s outcome has been questioned by legal professionals, but it gives you an idea of how your status will be determined)

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