Contractors’ Questions: What if my big multinational client wants to move me from outside IR35 to inside IR35?

Contractor’s Question: I’m on an outside IR35 contract for a large multinational and I’ve been informed that the company is moving to inside IR35 across the board, in a few months’ time which falls when my contract is up for renewal.

I’m wary that if I were to accept the change in my contract that there could be a risk that as I’m doing the same role and simply moving to inside IR35, that could that open me up to a HMRC investigation and potentially backdate my tax liabilities to cover my period outside for the current role.

Personally, there are other considerations also and I’d be unlikely to accept an offer, but I’d like to fully understand the IR35/HMRC implications as fully as possible please.

Expert’s Answer: It is important to establish where the liabilities sit in the first place.

Assuming this is a direct engagement between the end-client and your limited company, and the end-client is a medium/large business (with a UK presence), then they (the end-client) will be responsible for issuing an IR35 Status Determination Statement. The end-client will also hold the liability for any underpayment of tax and NIC resulting from an incorrect IR35 determination i.e. the client had made an outside IR35 assessment when in fact it should have been inside IR35.

‘Reasonable Care’

Under the off payroll working rules, the decision-maker (i.e. the client) is required to demonstrate that they took “reasonable care” when determining whether the rules apply to the engagement. What is considered “reasonable care” is a grey area as this will look different for different clients, so it’s not a one-size-fits-all approach.

However, HMRC does not view blanket ‘inside IR35’ determinations as taking “reasonable care” when considering IR35 (ESM10014).

The client will need to be able to show that they considered each engagement on its own merits – this means reviewing the contract and working practices for each contractor at the very minimum. If HMRC believe that the client did not take “reasonable care,” they may be subject to higher HMRC penalties following an enquiry.

A risky move

Generally speaking, there is always a risk associated with changing the IR35 status of an engagement, especially if there are no major adjustments to the contract or working practices.

HMRC could ask the question “Why was there a change in employment status if there was no change in the way you work?”

If the reality is such that the engagement is largely the same, HMRC could argue that the entirety of the engagement should have been treated as ‘inside IR35.’ This will attract additional tax, NICs, interest and penalties.

Liability

That being said, working under the assumption that the off payroll working rules apply, this would be something the client has to consider, as they would be the liable party as both the fee-payer and the IR35 decision-maker.

It is unlikely that a contractor working under the off payroll working rules would be liable for any incorrect IR35 determinations made by the end-client. The legislation specifically places any tax and NIC liabilities with the fee-payer, which under certain circumstances can transfer up the contractual chain to the end-client where “reasonable care” has not been taken. In a direct engagement, the end-client will be both the decision-maker and the fee-payer and therefore will be responsible for the determination and liable for any incorrect assessments. Good luck!

The expert was Nikola Nowak of Markel Tax