Yup, that got your attention. Clickbait title aside, the changes to ITEPA 2003 Ch 10 introduced in the Finance Act 2020 does have some good points. Have your eyes glazed over yet? :)

Before I continue here are the usual disclaimers - the following is my opinion only - I could be wrong in my interpretation, and should not be construed as legal or tax advice. If you spot a mistake, feel free to correct it in the comments. I’m talking about contracting in the IT sector specifically as that is what I know. I have no idea if independent professionals and freelancers in other sectors have had similar experiences.

So what are you anyway?

I’m a software engineer and agile coach and I provide services through my limited company. I conduct my business as a proper business, I am most definitely not a temp or a client employee in all but name. That difference has been the crux of the intermediaries legislation (aka IR35 or ITEPA 2003 Ch 8).

Professionals in my situation have been navigating the contract and tax minefield around this perception of who we are for over 20 years now. It’s an utter PITA and takes up resources that we could be using to provide services and build product for our clients. On the other hand it has forced us to have a very clear view of who we are.

Contracts in the supply chain

One of the most difficult things to manage is the perception our end clients have of us. In many cases, our contracts are handled by the client’s HR, who in some cases just don’t see the distinction between a business providing services and rent-a-dev temps who look like employees without the hassle of holiday pay or pensions. This isn’t helped when our connection with the clients is frequently handled by agencies and other intermediaries, so we don’t get to clear perceptions until after the contracts have been signed.

A standard engagement via an agency or consultancy firm has at least two contracts: there’s the contractor to agency contract (the one us freelancers sign on behalf of our companies), and the agency to client contract - frequently called the upper and lower contracts (but I can never remember which is which). A longer supply chain will have more contracts.

I’m a firm believer in having good contracts and sticking to them. Over the years I’ve required many changes to contracts that did not reflect the way my company provides services. I favour the terms generally seen in ‘outside IR35’ standard contracts not because they’re a magic tax get-out-of-jail-free card (they aren’t), but because the same terms that describe an outside IR35 engagement also describes how an independent company like mine operates. That’s why the contracts are often described as outside IR35. It’s not all about the tax.

The difficulty is when the nice clean contract I have signed, which clearly defines how my company is going to provide services, bears little resemblance to the other contracts in the supply chain. These may or may not describe me personally being indistinguishable from an employee on really bad employment terms. I rarely get to see those other contracts so have no idea how my company’s services are being presented to the client. Worst case, the client thinks they have another effective employee on board and it’s an uphill struggle educating them after the contracts have all been signed.

The issue here is that the contracts in the supply chain don’t match up, and us freelancers at one end of that chain rarely get to find that out until there’s a tax investigation and the client during interview says “of course they’re a temp - that’s what the agency/consultancy/whatever sold us”. There are ways to reduce the risk of this, but they involve a hell of a lot of extra legwork on our part and/or the goodwill of our clients.

Off payroll legislation changes

So, as of April 2021 that changed. The legislation and its implementation caused a load of other problems, granted, but it does have one big advantage. For the clients to which Ch 10 now applies (medium to large companies with offices in the UK), they are required by law to provide an IR35 status determination statement (SDS) up front. In my possibly naive view, that means they are required to confirm in writing what their perception of my company is. If a potential client insists on excessive direction and control, and they give a status determination that makes me personally look like an employee of theirs, then the contract just doesn’t happen. There’s less worry about both tax status and whether incorrect perception of what my company does is going to prevent me from doing my job effectively.

Unfortunately it’s tax law, and anything involving money has to get complicated. The difference between Ch 8 and Ch 10 is poorly understood by many agencies and clients. I’ve had to educate entities that insist they’re the client for the SDS when they’re clearly not, those who claim a contract is automatically outside IR35 as the client is overseas, clients making blanket determinations for all contractors as they don’t want the risk, etc.

The SDS can just be a “You’re inside/outside” with little supporting information, which isn’t great. The current commonly used SDS source is the CEST tool, which has its own host of problems (see IPSE or Dave Chaplin for the details there) - unfortunately I think it’s currently the best we’ve got. It may not have the same weighting on business factors as are represented in case law (long story), but it does ask some questions which clearly show the client’s perception of the contractor, and it is said to be honoured by HMRC assuming the client was accurate and the contractor’s working practices match the answers.

Summary

In short, for a freelancer, the requirement to get an SDS up front gives us an opportunity to make sure our contracts show us to be the real businesses we are (at least at both ends of the supply chain). It also sets expectations with our clients as they’re the ones that have to provide the SDS. If a client really does want an effective employee, it’s obvious prior to contract signing. At that point I would either persuade them (via the supply chain) to engage my company as a proper business to provide services, or failing that just walk away. Clean and simple.

Shared at https://www.linkedin.com/pulse/off-payroll-legislation-private-sector-good-points-donal-stewart