IR35 is complicated on a number of levels, and the new rules – meaning that many businesses are now responsible for making and communicating the IR35 decision instead of the contractor – add another layer of uncertainty.
As there is no legislation that outlines exactly what an ‘employee’ looks like, the decision relies largely on case law and that is down to interpretation. To provide some much-needed clarity, we have busted some of the common myths surrounding IR35.
Myth 1: “6 April 2021 was the date to start getting ready for IR35.”
Busted: We should all have been ready by 6th April.
Myth 2: “Her Majesty's Revenue & Customs (HMRC) won’t do any compliance visits in the first 12 months.”
Busted: Although HMRC are initially going with a soft-landing period and light-touch approach, that doesn’t mean there won’t be any compliance visits. It means that in the first year they will help you get it right. There will still be compliance visits because HMRC need to ensure that people are paying the right amount of tax.
Myth 3: “Where HMRC find tax due, there won’t be a penalty.”
Busted: There is still likely to be a penalty, even in this first year. Then in the next tax year – starting 5 April 2022 – they will want to recover any tax that hasn’t been paid and the interest on it, because it should have been paid earlier.
Myth 4: “If an investigation is done in the future and is dated back to the soft-landing period, the fines won’t be as harsh.”
Busted: If HMRC come across an end client that hasn’t done things properly, regardless of whether the error began in the soft-landing period, the penalty fee will date right back to when the light-touch regulations were in place. The soft-landing period gives you the opportunity to get things right, but if you haven’t got things right two years later then you will be fined for the whole lot.
Myth 5: “HMRC are all bark and no bite.”
Busted: Fines from HMRC are not to be scoffed at. The Department for Work & Pensions (DWP) was fined over £87m in tax, National Insurance contributions (NIC) and associated penalties by HMRC for their failures regarding the operation of IR35.
Myth 6: “HMRC’s Check Employment Status for Tax (CEST) tool is accurate.”
Busted: By the HMRC’s own admission, 19% of users of the tool have had indeterminate results. The CEST tool automatically assumes there is mutuality of obligation because contractors have signed a contract and it can be easily manipulated by answering its questions slightly differently to reach a preferred result. An assessment tool in isolation isn’t a guarantee of the right decision. Human intervention is vital as contracts and clauses must be properly reviewed.
Myth 7: “HMRC will stand by its CEST results.”
Busted: There is a strong caveat stating that it will not stand by the results if a compliance check suggests incorrect information was entered. Using the CEST tool in isolation is risky. DWP used the CEST tool and was fined millions.
Myth 8: “A contractor isn’t an employee if they don’t get the perks of an employee.”
Busted: There are three things that make someone an employee: an employee has to show up for work and can’t send somebody else instead; there is somebody in the chain above an employee who can tell them what to do; and there is mutuality of obligation. Mutuality of obligation is when there is an obligation for the employer to provide work and the employee to accept that work. Those three identifiers class contractors as employees and inside IR35.
Myth 9: “If it is a really short engagement IR35 can’t apply.”
Busted: Whether a contractor is working for a company for a day or a year, IR35 could apply. A decision should be made and communicated via a status determination statement (SDS) irrespective of how short the engagement is.
Myth 10: “How much you are paying someone is a measure of whether they are inside or outside IR35.”
Busted: You can be inside IR35 just as easily on £200 a day as you could be on £1,000 a day. How much someone is paid is not necessarily an indicator of IR35.
Myth 11: “Working for multiple companies means you’re outside IR35.”
Busted: As most contractors have fixed hours and days, they are still likely to be inside IR35, even if they have more than one engagement. However, if a contractor is controlling which clients they work for on which day, they may have an argument to be outside IR35.