HMRC have published some new IR35 guidance today – running to 47 pages.
Its here: http://www.hmrc.gov.uk/ir35/guidance.pdf
We’ll be analysing it over the next few days and letting clients know our thoughts.
As we understand it, it’s nothing new, just clarification of HMRCs thinking – which, as the court cases and tribunals show, isn’t always correct.
Update – 10th May 14:15
As suspected there is nothing materially new, nevertheless some interesting, but confusing, content.
~ There has been no change to the mechanics of IR35 viz legislation, case law or HMRC practice on how IR35 is considered.
~ What this document addresses is risk factors at an organisation wide level to see whether an entity is high/medium/low risk. IR35 itself is assessed on an engagement (contract) by engagement basis. The risk factors help HMRC, and the taxpayer, to assess whether engagements are likely to be caught – however low risk organisations could still have IR35 caught contracts, and a high risk doesn’t automatically mean engagements are caught.
~ The risk factors codify issues that we already take into account for advising clients re IR35 and in contract reviews, and there is nothing unexpected in them. Strong emphasis is placed on factors like an organisation having premises, hiring staff / sub contract assistance and working on fixed price contracts. Weak emphasis is placed on what are often perceived on IR35 “get out of jail cards”, eg a notional but unused right of substitution, PI cover. These later factors are useful but have always been considered weak indicators.
~ Contractors/ PSC users are advised to read the guidance as it gives some good indicators of the things you need to do to reduce risk. Although the guidance is primarily about the risk of IR35 applying or not, the points covered would also help tip the balance on a borderline case.
~ Confusingly having started by outlying these risk factors applying organisation wide, the guidance then goes into case studies at engagement level – explaining why certain engagements are IR35 caught, not caught or borderline. These case studies are worth reading to understand HMRC thinking – note though that HMRC’s thinking may not agree with the courts / tribunals; HMRC have lost far more cases than they have won.
~ HMRC have indicated that IR35 compliance is going to be taking higher departmental priority in the future, and this guidance will be a first line filter for making sure inappropriate cases are not taken up. Contractors / PSC users are advised to bear this in mind and endeavour to meet as many of the tests as possible.
~ There is a useful article on HMRC’s compliance / inspection plans on AccountingWeb http://www.accountingweb.co.uk/article/ir35-business-entity-tests-published/527241 – as awlays we strongly advise all clients to have insurance, either via our Fee Protection scheme, or via PCG membership, or similar – the cost / benefit / risk equation on this insurance is very good.
A few things are particularly worth noting from the case studies:
~ The emphasis placed on financial risk, the tests for “efficiency” (ability to improve profitability) and “client risk” (bad debt / non payment risk) being relevant here. These tests are used in the case studies regarding fixed price contracts compared to by-the-hour/day contracts. We’ve long said to clients in IR35 contract reviews that more emphasis needs to be placed on moving away from by-the-hour/day to fixed price, and its a surprise that this hasn’t been taken up more as it is an easy win in improving your IR35 position. With some creative thought many by-the-hour/day contracts could be rewritten as fixed with a price adjustment/protection mechanism which protects both parties commercially but is more IR35 friendly.
~ The IR35 weakening effect of being engaged across a number of tasks as a general labour resource, compared to the stronger position of being engaged for a specific task / project.
~ Length of time / number of clients isn’t a big issue – viz case study “Hamish” – outside IR35 despite only having one client in four years- and “Juanita”, only borderline despite eight years with one client
Conclusion: there’s nothing new here, but the content should be considered carefully by those potentially affected re IR35, and the risk factors and case studies considered. Contracts that are structured on a by-the-hour/day payment term and with little care given to definition of tasks / projects are more at risk than ever.