It’s important to have an understanding of IR35 to help you plan, recruit and retain the best contractors, particularly being mindful and supportive of their potential need to have some elements of their contracts amended, as it will be coming into effect in April!
HOW DOES IR35 WORK?
IR35 says that if a contractor acts like an employee, then they should be taxed like an employee, regardless of whether they are working through their own contractor Ltd company.
However, clients should not be concerned; a contractor deemed as “inside” IR35 and must pay tax like an employee, does not receive employment rights like an employee.
- Any contractor deemed “inside” IR35 must pay income tax and NIC contributions.
- Any contractor deemed “outside” IR35 is classed as providing a genuine business to business service and is therefore not subject to the same tax as an employee.
CLIENTS ARE RESPONSIBLE FOR DEFINING THE IR35 STATUS OF A CONTRACTOR
- The responsibility of defining the IR35 status of a contract will switch from a contractors Ltd. company to the client, the recipient of the services.
- The legislation will place the onus on the client, to inform the recruitment agency if the assignment is “inside” or “outside” of IR35.
THE 3 MAIN PRINCIPLES TO DECIDE IR35 STATUS
Clients will need to demonstrate that at least 2 of the top 3 principles don’t apply to your contractors and working practices, in order for them to avoid being affected by IR35.
- Supervision, Direction, and Control: what degree of supervision, direction and control does your contractor need over what, how, when and where they complete your contract and day to day work?
- Substitution: are they required to carry out the work themselves, or can they send someone in their place? The contractor can or will provide and pay for a substitute.
- Mutuality of obligation: are you obliged to offer your contractor work, and are they obliged to accept it? The contractor has no entitlement to a notice period and risks immediate termination of contract.
Other principles that are considered include:
- Financial Risk: Does the contract place financial risk on the contractor? The contractor is exposed to reduced or non-payment if the work is unsatisfactory.
- Distinction: can the contractor be easily identified as independent from your employees? The contractor does not attend staff meetings or events and does not benefit from perks and discounts.
WHAT DOES THIS MEAN FOR CLIENTS?
Where a contractor is assessed as being “inside” IR35, the party responsible for paying the contractor (either the recruitment agency or client, if they are paying contractors directly) will become responsible for deducting income tax, NICs and making tax payments to HMRC.
WHY SHOULD YOU BE BOTHERED ABOUT IR35?
Contractors will be worrying about determining whether they are “inside” or “outside” of IR35 and may ask clients, to make changes to written contracts, specific working practices and for various documents to be signed, in order to clearly establish the day-to-day relationship with their client in writing.
If you understand why these requests are being made, you can manage contractors and their requirements for change, more effectively.
WHAT SHOULD YOU BE DOING TO PREPARE?
ACT NOW, in order to have this resolved before April to reduce the risk of any financial penalty or loss of talent.
What are companies doing?
- Conducting contractor workforce audits of each contract role to establish whether any current and / or future contracts fall “inside” or “outside” of IR35. (Applying a determination on a group of contractors is fine, as long as the role and contracts are the same.)
- Provide contractors with a Status Determination Statement (SDS), a comprehensive from the client which: declares a contractor’s deemed employment status following an IR35 workforce audit, providing reasons for reaching the conclusion. If requested, contractors present the SDS to HMRC.
IF THEY FALL “INSIDE” IR35:
- Establish if the contractor absorbs the change or requires a rate increase to offset the change in regulations?
- Establish if the project can allow for any increase? If not, how exposed is your business to retaining or attracting the required talent to complete its projects?
- How will you retain project critical contractors if neither an earning reduction nor cost increase is viable?
CONSIDER IR35 “FRIENDLY” CONTRACTS
You should not be alarmed by contractors requesting changes to their contracts. This is not an attempt by the contractor to avoid their responsibilities; merely to keep themselves outside of IR35.
Some of the contract changes that you may be asked for are:
- a contract for services, rather than a contract of employment.
- day rates rather than hourly rates.
- clear contract start and end date.
- showing the client does not “control” the contractor.
- stating the contractor can use a substitute, which the client has no power to vet.
- no “mutuality of obligation” (a classic test of employment).
- not requiring the contractor to work on-site (although there may be practical issues like access to vital systems equipment).
- showing the contractor is not required to work specific hours.
- contractors termination / notice period should be no more than 2 weeks.
- stipulating the contractors are required to have professional indemnity and public liability insurance.
This is a judgement call, and obviously you should only sign a statement that truthfully reflects a contractor’s working arrangements.
You may feel highly unsympathetic towards contractors and reluctant to make any changes from the norm, but equally it may become difficult recruiting and retaining good contractors if you insist on contracts which are full of either misleading or unnecessary IR35 “unfriendly” clauses.
CONFIRMATION OF ARRANGEMENTS
Once recruited with their IR35 “friendly” contract signed and sealed, the contractor may ask you to sign a “Confirmation of Arrangements”. This is simply the contractor’s method of trying to clarify how they worked with their client, for the purposes of any future tax investigation.
The contractors “Confirmation of Arrangements” is likely to say things like:
- they are required to sign-in every day.
- they are not allowed to use subsidised staff facilities, like canteens and gyms.
- they work regular hours for the convenience of and out of professional courtesy for their client, but do not have to.
- they can work from their own office at times, which may be a home office.
- they determine how to do the work on the project they are contracted to complete and are not told to do so by the client.
- they will only perform duties consistent with the contract and will not take on any old job that needs doing or that they’re instructed to do.
- they can use subcontractors to perform aspects of the job, if they wish to.
- they can send in another contractor in their place.
Counter-signing an accurate Confirmation of Arrangements for a contractor during the contract may be a good strategy to avoid being called as a witness in an IR35 tax tribunal or high court appeal in the future.
HOW CAN CG CONSULTANTS SUPPORT YOU?
We are well placed to help you navigate this legislative change, by:
- sharing market information and best practice
- introducing you to independent specialists who can help assess and audit your existing contractors, as well as providing you with the latest market intelligence on the reform.
- offering options of compliant delivery solutions to help retain critical contractors.
- offering support relating to mapping of resource availability, policy around engagement and cost, to help you assess the fiscal impact/options.
- assisting with replacement of talent should some of your contractors leave as a result of the pending changes.
- partnering with CG Consultants on an exclusive or retained basis to provide contractor solutions, reducing the risk of non-compliance across your business.
It would be easy to put IR35 in the “to do later” pile, but April will be with us before you know it! Our advice would be to audit your contract workforce and plan now. If you would like our support or advice, please call us on 01267 682 733.