Exclusive! Cabinet Office & HMRC clarify guidance on Contractors and IR 35

We’re coming back today to the UK government Policy Note on use of contractors (“contingent labour”) issued recently. We explained its contents and the key issue of IR35 here in our previous post.

I went back to Cabinet Office for clarification on a key point – were they suggesting that projects of  less than 6 months in duration were “clean” in terms of IR 35? Public bodies only have to report on assignments of greater length, so did that mean that contractors would also not be caught by IR35 if their assignments were less than that length?

After one reply that tried not to answer my question, I got this – a joint reply, no less from three Departments, which indicates the sensitivity of this! (And thanks to whoever put it together).

"Please see the response below on behalf of the Cabinet Office, HMT and HMRC.

 1. The PPN (Procurement Policy Note) gives advice to departments about the new assurance steps departments are to follow.  Government is clear that all contractors should meet their tax and NICs obligations, including operating the IR35 provisions whatever the length of the contract.  HMRC guidance to contractors can be found at http://www.hmrc.gov.uk/ir35/guidance.pdf .   All contractors, including those with contracts under 6 months, may need to make ‘deemed payments’.

 2. The PPN is just setting out the process for checking people are properly complying with the new assurance rules; 6 months was considered the best point to undertake checks to pick up people while not disproportionately overburdening contractors or departments".

So there you have it. 6 months is not a cut-off point.

Whilst I don’t think for a moment that HMRC are going to start mounting major investigations into assignments of 2 or 3 weeks – or probably 2 or 3 months – contractors should not get a false sense of security. Just because your assignment is 5 months rather than 6 does not mean you are immune from IR35 if HMRC decided to come after you.

And remember, it won’t be the public sector body who get penalised – it will be you. You may be required to pay what is deemed that you owe - your own tax, National Insurance AND the employers NI that you have “avoided” by not acknowledging your employed status.

Also bear in mind that working through a service company, or several layers of service companies, does nothing to protect you. If the HMRC decide you were in reality working as an employee, you’re nicked, mate.

So what should you do?

Well, if in doubt, take legal advice. I should stress I am not a lawyer and I'm just giving you my opinion. (If any lawyers want to comment here, please do!) But I'd suggest that first of all, read the really excellent HMRC guidance referred to in that statement above.  That lays out  some examples and the key points to consider in terms of whether you are really employed.

Then, if you’re going to be working for more than a few weeks, my advice is to frame the assignment as far as possible as consulting type work. Get agreement that you can, for instance, deliver it from locations of your choosing, and that you're not tied to working 9 to 5.  Get some clear deliverables. Perhaps look at the right for you to substitute staff.

Of course, this won’t be easy if really the employer actually wants you to do a 9-5 job i.e. they want you to act as an employee. In that case, you need to assess the risks. If it is a very short assignment, then you might decide to accept the risk - let’s face it, HMRC don’t have a great track record for successfully chasing IR35 type payments.

If it is over 6 months and is going to be reported to Cabinet Office, I'd be very cautions about accepting anything other than a genuine consulting piece of work.  Or might a fixed term employment contract be a viable option, particularly if it is for a reasonable  period of time?

And bear in mind that, given the focus on all this, I wouldn’t be surprised if the Revenue do decide to try and make an example of someone now....

In our next post on this topic, we’ll look at other implications of this development beyond the likelihood of individual contractors being pursued through the courts...

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Voices (2)

  1. Life:

    Here here, yet another bonkers idea.

    There must be a less extreme option – vaccination?

  2. Final Furlong:

    Here’s a great idea.

    Start awarding ‘consultancy’ contracts to large (or medium-sized firms) who can charge, as we’ve seen recently in the MOD, up to £3,900 per day (not including day-to-day expenses, mind you) for staff to support their initiatives, five days per week, for 12 months, or more. The folk on the ground, of course, will be PAYE. The ‘owners’ (aka Partners), of course, will be enjoy the benefits of being part of a ‘tax-efficient’ limited liability partnership. Some even have HQs based in other countries to minimise their corporation tax liabilities.

    Stop awarding ‘interim’ contracts to ‘Contractors’, who will charge £3,000+ per day LESS to deliver similar or better outcomes, because, annoyingly, they are now being chased around the UK by inspectors in HMRC for paying their tax through limited companies and adhering to all of the related tax rules laid out by, erm, HMRC.

    I think you’ll find that, on the basis of TCO, over time, government (taxpayers) will pay a lot less.

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