Tax  

Managing the challenges of IR35

  • Describe some of the challenges posed by IR35 reform
  • Identify the problems posed by CEST
  • Describe how contractors who are outside IR35 should behave
CPD
Approx.30min
Managing the challenges of IR35
(FT/Fotoware)

I am not sure that any other UK tax legislation creates quite as much confusion or demands as much attention as IR35. 

From the complex nature of determining the IR35 status of a contract worker to ambiguity over which party is liable for non-compliance, this unpopular tax rule is easily misinterpreted and misapplied – a mistake that can cost tens of millions of pounds, if the staggering tax bills issued to government departments in recent years are anything to go by. 

Such is the puzzling nature of IR35, here at Qdos we field a host of questions day-in-day-out about this notoriously controversial tax legislation, which was introduced in 2000 before being reformed in recent years. 

The reform, first enforced in the public sector in 2017, before being mirrored in the private sector in 2021, saw the responsibility for assessing IR35 status transfer from the contractor to the end client. The liability – in other words financial risk – was also shifted away from the contractor, to the fee-paying party in the supply chain. 

What is more, since the roll-out of IR35 reform it is not just contractors who have questions they want answering. With recruitment agencies and end clients also exposed, the need for clear, concise and trusted advice in this area is unquestionable. 

Taking all of this into account, I will now debunk and explain in layman’s terms some of the big talking points and myths surrounding IR35. 

Contractors are no longer liable for IR35.

Following IR35 reform, the liability no longer lies with the contractor in all cases but one. 

IR35 reform applies to public sector bodies and medium and large businesses, but not small companies. As a result, contractors engaged by companies that HMRC classes as ‘small’ remain responsible for determining their IR35 status and liable for any mistakes. 

Secondly, HMRC retains the right to investigate contractors retrospectively, which means contractors are still technically at risk. The tax office continues to focus on contracts that were completed before the introduction of IR35 reform, to a time when contractors held the liability. HMRC can scrutinise contracts up to six-years-old – potentially older if deliberate non-compliance is suspected.

So what does this mean? Well, in simple terms, the threat of an IR35 investigation still hangs over contractors regardless of IR35 reform. 

Only end clients are now liable for IR35

In some circumstances, the liability rests with end clients. However, this only applies to medium and large businesses (and public sector bodies) in the event that the business is the fee-paying party. 

Assuming all legal obligations have been fulfilled throughout the supply chain, the fee-paying party – typically the recruitment agency placing the contractor – is the liable party and will carry the can for non-compliance.