As the saying goes, only two things in life are certain: death and taxes. Death is a given as it is a natural aspect of everyone’s life, whereas taxes are an obligation that must be fulfilled by us as law-abiding citizens.
As with many laws, tax rules are no exception and they have changed over time.
IR35 has been in effect for nearly 21 years, its aims were to address and deter those individuals who declare that they are self employed and as a result avoid their tax and national insurance contributions that they would be liable for should they be employed.
Generally, these workers are supplying their services to clients via a personal service company (PSC), or other similar intermediary, such as a limited company, but in practice are mirroring what an employee would do if an intermediary was not used.
Such arrangements can result in individuals paying less tax and remove the need for employers/the client to pay National Insurance Contributions, as well as benefits (like sick pay and holiday pay).
Working inside IR35 means that the service being provided is deemed by HMRC to reflect an employment relationship and not a self-employed one. This financial implication can be significant as the individual would be considered an employee for tax purposes.
IR35 has always required that contractors interpret a complex set of employment status tests to determine whether their contract places them inside or outside of IR35. They were always responsible for assessing their own IR35 Status. The changes to the public sector that were introduced in April 2017 placed the burden of responsibility on the company that pays the contractor. HMRC intended to extend these changes to the private sector in April 2020, however these changes were postponed due to the coronavirus pandemic and they were pushed back a year.
What are the New IR35 Rules?
The changes set for April 2021 may put the onus of the determining the IR35 status on the client rather than the contractor in the private sector as well as the public sector. However only companies which are not “small” (defined by the Companies Act 2006) will be subject to these new rules, if the companies are classed as small then as the contractor you will continue determining your own status. Companies Act 2006 defines small if they satisfy 2 of the following:
- Employ no more than 50 people
- Annual turnover of no more than £10.2m
- Balance sheet worth no more than £5.1m
Whilst the law now may not always require contractors to assess their own status (depending on the above) it is still advised that they play an active role in the process. There is a lot of uncertainty around IR35, a complex piece of legislation that even with case law and HMRC guidance, there is not a single simple answer to determine IR35 status.
How to Determine Your IR35 Status
Quite a biggy, setting the standards and the working practices in the beginning is an absolute must. The working practices of the relationship will need to reflect the written terms of the contract should there be an investigation. If the contract that has been written, bear no resemblance to the actual working practices, the written contract will likely be ignored by HMRC. However, it is the first thing they will look at. This is another example of why templated documents really do not accurately protect a business agreement.
Contracts should be checked for each project on renewal and must provide clear evidence to support any status as a self-employed professional engaging with a client rather than an employment relationship. The scope of the works should be described accurately and in great detail.
As a contractor – Have you own contract drafted. Every future assignment would then be on your terms and you know you have the control. If you have been given a contract to sign get it checked. We offer a document checking service for just £99 + VAT
As the client – Check the agreement you are distributing to your contractors is one that would fall outside IR35. If you don’t have one at all then by default the person you are engaging could be deemed as employed and land you in all sorts of trouble. Get a contract. We can help with that.
- Supervision, Direction and Control
Before agreeing a contract, it is essential that there is confirmation that the contractor is in control of where, when, what and how the work is carried out. If a client wants to control these individuals, and stipulate times, days, office bound, then they must employ them.
X – Clients should not be telling contractors how to do the work, only confirming what work is required.
X – Contractors should not need to seek permission or need a sick note to take time off.
X – Contractors should not be involved in any appraisals or disciplinary hearings.
X – Contractors should not be told when to have a break.
In the contract ensure there is a comprehensive job specification. This specification would outline:
- The services to be provided, where and how many hours in each day they are to be provided.
HMRC has been quoted as saying more generally that: “Where there are procedures, methods and instructions which must be followed, it is likely there will be SDC over the manner in which the services are provided.” Therefore, falling inside of IR35. It is worth noting that there have been exceptions to this as case law has developed.
Another test of ‘employment’ is whether the contractor can provide a substitute to do the work.
If the contractor is sick, or unable to complete the services for another reason the contract should be clear that they are able to send a substitute to complete the work on their behalf.
If the contractor can genuinely provide a ‘substitute’ and on occasion actually do, then the contract is likely to be outside the scope of IR35. You should ensure that there is a right of substitution clause in every contract whether you are a client or a contractor.
If the client is only interested in the suitability and skills of one contractor and no substitute can be offered or accepted and a substitution clause states this, this is usually a good indicator that the working arrangement of the contractor is that of an employee and are not self-employed.
- Mutuality of Obligation
Mutuality of obligation is another test to determine IR35 status. Mutuality of obligation means an employer is obliged to provide work and a worker is obliged to accept it which is the case in most employer-employee relationships. Genuine contractors who fall outside IR35 should neither expect nor receive such mutuality of obligation. A contractor should be engaged on a contract for services basis, to perform a specific task for a specific project, and once the project is over the contractor moves on, or may be offered a new project by the client.
The contract should allow the contractor to refuse work, work for other clients and as above be on a project by project basis. If the contract specifies exclusivity and states that the contractor must work a certain number of hours per week at a certain rate on an ongoing basis and requires the contractor to take whatever work the client throws at them, then this would suggest the contract should be inside IR35.
An IR35-proof contract must state the client has no obligation to offer work and any clauses to extend the contract should be avoided, it should state that it will be terminated at the end of the project and a new contract should be discussed once a project had been completed.
- Corporate Involvement
Contractors should not become part of the company furniture. They should not be on organisation charts or wall rotas, have business cards or a work email address and they certainly shouldn’t be answerable to anyone whilst performing their obligations. There should be no sick notes needed, no dictation on when a contractor takes a break and for how long, the only concern is that the work is done as per the contract.
Even having a security pass to the client’s building, or keys, or knowing the passcodes for different areas can indicate there is an ir35 concern. A contractor should be using his or her laptop, tools, mobile phone to ensure the separate contractual relationship.
Whilst many contractors will not have any stock or premises, a contractor can still demonstrate they are in business on their own account by having an accountant, having other clients, a Facebook page, a website, and providing invoices.
Whilst the burden is going to pass to the client in some instances, it is still important for the contractor to play an active role and be clear on their own status. So, whether you are a contractor or a company that uses contractors increasing your understanding of the IR35 rules is essential if you want to avoid a possible HMRC investigation or penalty. As the saying goes, “knowledge is power”. By familiarising yourself with the provisions of this particular tax legislation, it will be easier for you to avoid making mistakes that could put your business at risk. In addition, it will help to ensure that all your contracts are IR35-friendly. Fortunately, this is something we can do for you at BEB. Our team of legal experts can perform a thorough examination of your contracts and provide you with the advice you require. Speak to us today by calling 01604 217365.