IR35: Potential pitfalls and how to avoid them

Our road transport tax consultant Alastair Kendrick has given us an update on the Government’s IR35 tax changes, which came into effect last week.

This is, essentially, an attempt by the Government to crack down on tax evasion and avoidance, preventing people being paid as freelancers when they should be paid as staff.

In the past, drivers of commercial vehicles have claimed to be freelance when in reality they were working for just one company. This meant they weren’t taxed under PAYE rules or deducted the usual National Insurance contributions, and therefore getting a higher take home pay while paying less tax.

Alastair explained to us some of the arrangements he’s seen in the haulage industry, which demonstrate that those advising clients are engaged in supply chains need to take care and to be alert to these trends and associated risks.

Third-party status determinations
A numberof operators are outsourcing the status determinations to third-party specialists. However, in a number of the cases Alastair has seen, the third-party specialist is not determining the status of the contractors using the HMRC CEST  (Check Employment Status for Tax) tool but instead using their own in-house tool.

Unfortunately these often seem to take into account factors not considered by HMRC in the Check Employment Status for Tax tool, which could lead to conflict with HMRC.

Outsourced contracts
Some end clients have suggested that the intermediary could consider changing their contractual arrangement to an outsourced arrangement, which would leave the position between the intermediary and end client, and outside IR35.
This, however, leaves the risk with the intermediary who would be required to comply with IR35 if their size meant they would, under CA 2006, be considered a medium or large company.

Umbrella companies
Some operators have passed all the responsibilities regarding IR35 to an umbrella company. Others are requiring that any contractors who are ruled under the status determination statement (SDS) to be a deemed employee to be engaged from 6 April 2021 via an umbrella company so that they can avoid the need to put these contractors on their own payroll.

Anyone entering into these types of arrangements needs to remember:
• That any PAYE and National Insurance is calculated on the earnings paid to the contractor, and that there are no sums paid to them outside of the PAYE system.
• That in determining the PAYE and National Insurance of the contractor, care is taken over the treatment of expenses which are paid.
• That there is not a ‘contract for services’ introduced by the umbrella company in regard to the work undertaken by the contractor.

Alastair has written about IR35 for us before, and you can read his overview and insights into what’s going on here.

You can also access further advice from the Government here.