How contractors can prepare for 2021 private sector IR35 reform

Most PSC contractors know by now that from April 6th next year, they will lose the right to set their own IR35 status -- that is unless they work with a ‘small’ company in the private sector, writes Seb Maley, chief executive of Qdos.

Much like in the public sector following similar reform in 2017, from April 2021, the responsibility for determining a contractor’s IR35 status will transfer to the end-client, with the liability also shifting to the ‘fee-payer’ in the supply chain.

Given the chaos that arrived after public sector changes were enforced three years ago, resulting in thousands of risk-averse IR35 decisions, contractors are understandably concerned about the prospect of further reform next year.

Many independent workers fear their clients -- irrespective of the fact that these are fairly substantial companies -- do not have a strong enough grasp of the IR35 legislation to make well-informed decisions regarding tax status and will instead prioritise ‘inside IR35’ determinations to protect the liability they will often carry.

However, amid the changing IR35 landscape there are two important factors contractors should take into account:

1. Despite reports that several firms will make blanket IR35 decisions, through the work we are carrying out in the private sector, we are confident that ‘outside IR35’ opportunities will continue to exist after the introduction of the April reform.
2. Despite not having the power to set IR35 status, that’s not to say a contractor cannot influence the outcome of this decision.

Focusing on the second point, and to help contractors safeguard their IR35 status, we’ve identified several factors to bear in mind as reform looms. They are preparations, of sorts, you can employ if you’re a limited company fed up with waiting for the other shoe to drop.

1. Take the initiative

In the event that your client or recruitment agency hasn’t been in touch regarding IR35 changes, you can take the initiative and reach out to them with a view to discussing their plans for reform. With a clear idea of how your client and agency intend to administer IR35, you will be in a position to decide whether you want to continue working on that specific contract post-April 2021 or source one with an engager that will assess status accurately.

2. Communicate with your fellow contractors

The saying ‘two heads are better than one’ is certainly applicable here. As a contractor, it’s well worth getting in touch with other independent professionals working with the same client to find out if they have held any talks with the engager about IR35.

Consider approaching your client together as a group to stress how important it is that they prioritise well-informed status decisions. If a business understands the implications that blanket IR35 assessments, for example, will have on its ability to attract contractors, there is a chance that it will reconsider its approach.

3. Confirm your arrangements

Explore the possibility of securing a Confirmation of Arrangements (CoA) document. Signed by your client, a CoA effectively confirms that all parties in the supply chain (including the recruitment agency), are in full agreement of a contractor’s IR35 status.

Granted, a CoA could be tricky to obtain, given it will soon be the client who carries the liability -- much like in the public sector. That said, should you achieve this, theoretically it will become difficult for your client to change your IR35 status on or after 6th April without good reason.

4. Prioritise ‘substitution’

The right to provide a substitute in a contract is often focused on in IR35 investigations. And while one factor on its own doesn’t typically deem you inside or outside the scope of the legislation, it’s worth ensuring your contract has a genuine right of substitution. Better still, actually exercising this right to provide an able substitute will strengthen your case for belonging outside IR35.

Given engagers are being advised by HMRC to use the taxman’s very own CEST tool - which will wrongly automatically class a contractor inside IR35 if there is no substitution clause -- it’s important to ensure your contract allows for this.

5. Stay aware of ‘Control’ and ‘MoO’

While Substitution is important, that’s not to say you should ignore two of the three other key status tests, Control and Mutuality of Obligation (MoO). To ensure you have the best possible chance of being considered outside IR35, it’s also crucial that you are able to show you are not under the direct control of your client, and there is no mutual obligation for the client to provide paid work and for you to accept it.

6. Seek independent advice

To strengthen your IR35 position, consider having your contract reviewed by an IR35 specialist, who will be able to offer objective advice. Armed with an in-depth status review carried out by an expert with no financial gain on the outcome of the assessment, you will be better placed to head off any potential risk-averse decisions that might be made by your client.

7. Demonstrate you run a legitimate business

Make it clear that you operate as a legitimate business -- an important, albeit not typically definitive factor taken into consideration when determining IR35 status. From taking out business insurance to having your own office address, company website and even stationery, it’s vital that you’re able to demonstrate to your client and, if required, HMRC, that your company is not a vehicle used to disguise employment.

Final thought

As the clock ticks down to the arrival of private sector reform, it’s important that you take these steps in an attempt to protect your IR35 status regardless of the fact that from next April, you will not be the party tasked with setting it.