In this piece, we’ll look more closely at what HMRC is looking for when they’re trying to prove if a worker is a genuine contractor or a disguised employee.
Firstly, they can look at a contractor’s tax arrangements at any time and they can look back up to six years of returns to retrospectively claim back higher future income tax and NIC payments accordingly.
Pay up, it’s cold outside...
The HMRC are looking for evidence that will prove if a contract or working arrangement is “within IR35”.
If they’re deemed to be inside IR35 then they’ll be eligible for income tax and NICs. Game Over.
The only derogation here is if the company that hired the worker is in the public or private sector.
If they’re in the public sector then it will be up to the company (or agency if they’ve hired the worker through one) to deduct and pay the appropriate dues.
This will be the same for private sector companies from April 2020 as the law changes to bring parity to both sectors.
Until then it’s up to the worker (or their personal services company (PSC) that’s contracted to do the work) to determine whether or not their contract is inside IR35. If so, then they’ll have to pay all the eligible income tax and NICs to HMRC
“It’s a yes from me” - Judges Criteria
HMRC use many individual data points and pieces of evidence to determine what a workers IR35 status is but there are three main areas that taken together, tend to provide a more definitive guide to status:
They would ask - if the client organisation offers the hired contractor work - are they freely able to reject it or are they obliged to accept?
They’re looking for “no mutuality of obligation” for the contractor. This means that they must be free to work on a project-to-project basis, be able to change employees or terminate a project part way through if necessary.
If they can’t prove they have any of these freedoms then they would likely be found to be in IR35.
HMRC will carefully examine what, if any, direction, control and supervision is directed over the contractor by their client.
They’ll look at how much say they have in how, what, when and where they fulfill the contract and their day-to-day assignments.
Being able to work on a project-by-project basis is another key indicator as to IR35 status, so there shouldn’t be any supervisory or directoral elements in any contract clauses dictating how, when and how they work or if there are any exclusionary or exclusivity clauses.
If there are then this could be a good indicator of being inside IR35.
Possibly the most critical and powerful determiner in the HMRC’s arsenal.
Does the worker or contractor have to carry out the work personally or can they provide a substitute or proxy to work in their place?
If somebody is hired specifically for their own skillset, experience and suitability for a project then it may be difficult to prove genuine employment independence under inquiry.
If they are unable to substitute for themselves then this would indicate employee equivalent status in most cases and a compelling IR35 judgement.
There are other contributing factors that HMRC take into consideration including:
There are also other small but subtle indicators to IR35 status such as whether the contractor has a company email address, do they have a job title that indicates a permanent part of the business structure or their own desk or office within a primary workplace.
HMRC have an online test that can be taken to help provisionally determine status.
It can be taken anonymously and won’t store any information given although the results can be printed out and maintained for record keeping, although it doesn’t provide a binding certificate of independence.
HMRC stated that in the first year following the reforms alone they raised an additional £550m in income tax and NICs and estimated that non-compliance with IR35 legislation in the private sector sees up to £1.2bn lost to the exchequer by 2022/23.
They say they are acting now to secure future funding.
There have been several high profile examples of contractors winning cases brought by HMRC but there are never any guarantees in the legal system of winning a case.
If you’re a contractor and your asking yourself questions about your status, how to prove it if asked or if you think there could be any confusion then contact us today.
After a free initial consultation with one of our expert advisors we’ll be able to clarify any concerns you might have about your status and advise you on any outstanding HMRC issues you or your company might have now or that might pop up when you least suspect it.