IR35 is changing, but before we talk about the changes, it’s probably important to define just what IR35 even is. IR35 is a piece of legislation that refers to off-payroll employment of contractors who provide their services through an intermediary. An intermediary is often a Ltd. Company that is set up by the contractor specifically to provide their services to end users, but it can also be a partnership, managed service company or even a sole trader. IR35 allows HMRC to collect additional payment of PAYE where it is deemed that the contractor is an employee of the end user in all but name. HMRC often call this disguised employment and, this shouldn’t come as a shock, they really don’t like it.
Whether you operate a business or are a contractor, you will need to be aware of and prepare for the changes.
Before we go any further, we do need to say that we’re not tax advisors. We’re just sharing our understanding of the changes and are not providing legal advice. We do need to stress that you should always get legal advice from a qualified source before making decisions that could have a lasting impact on your business or tax affairs.
First, the good news. IR35 has existed for some time and if your business is not classed as medium or large, nothing will change regards how IR35 affects your business.
Under the Companies Act 2006, your business is probably classed as a medium or large business if at least two of the following statements apply.
Your business has a turnover of more than £10.2m
Your business has a balance sheet total of more than £5.1m
Your business has 50 employees or more
For small businesses, the obligation will remain with the contractor’s intermediary (their own business) to decide whether the contract is legitimately outside of IR35 (not covered by PAYE) or whether it falls under IR35 and needs to be covered by PAYE.
For all other businesses, whether they are public (public sector employers have already implemented these changes), private sector or some charities, the responsibility (where they are the “end user”) now falls on them to determine whether a contract is under or outside of IR35. They will also be required to record in writing their decision and communicate it with the contractor and, if appropriate, agency.
Failure to properly make a determination or to communicate the decision, will result in the end-user automatically being held responsible for PAYE and NICs: this means it will be critical for your business to be sure of what they need to do.
First, we’ll take a quick look at the factors that can be used to determine whether it’s appropriate to treat a contract as outside of IR35 and then we’ll quickly outline the changes that are coming for medium and larger businesses.
For a contract to be deemed outside of IR35, then the following requirements must be met:
The Right of Substitution
The contractor must have the right of substitution enshrined within the contract. What does that mean? They can employ someone of their choosing to do the work. You as the end-user still pay the contractor or agency and the contractor in turn payrolls the worker that they employ. This has been a longstanding requirement of a contract that is truly outside of IR35.
Control and Direction
In most cases where professional services are provided, it is important that a contractor can demonstrate a certain amount of autonomy in the way they undertake a project. Both the written contract and working practices must show that the client has no influence over how the contractor performs their services.
Your business must avoid the following control factors that point to a contract being inside IR35:
Indicating that the contractor will be supervised
Payment of any “staff” benefits (including holiday or sick pay)
Defined working times such as: Start, End or break times
Contractual clauses that specify any rights of control or supervision over the contractor.
The reality of the situation is that the individual is responsible for the delivery of the services.
The individual will determine and control how and when they provide their services to the client, if they meet client-specific targets or project completion dates.
Mutuality of Obligation
This is a disputed area of law: the position of HMRC is very different from that of many practitioners and even case law. Mutuality of obligation is an obligation between two parties to provide and accept work and in an employer/employee relationship, mutuality of obligation is very easy to establish.
In client/contractor relationships however, it is less clear. HMRC claims that by having a contract agreeing to provide services, mutuality is established but most experts consider the legal picture to be more complex.
Other factors such as:
Any absence procedures
Continuity of the engagement
If the contractor has become “part and parcel” of the organisation.
These factors all have a bearing on IR35 status, so be aware. Your business will need to show that there is no mutuality of obligation in the contract at all.
As a Medium or Large Business, What Are Your Responsibilities?
Prior to 6th April, your business will need to carry out the test for every contractor it is currently engaged with who will still be engaged after that date. Your business will also need to carry out the test for every contract it enters into with a contractor after 6th April. No two contracts are identical, so this will need to be carried out on an individual basis. Thankfully, HMRC do provide a tool to help determine employment status, but if your business employs a large number of contractors, this could be a time-consuming process to go through.
To save time, some businesses have decided to operate a blanket policy of not employing contractors outside of IR35, but we don't feel this what HMRC intended with this legislation.
Blanket decisions can be a two-edged sword though and can lead to an inability to employ contractors at all! There is the perception that working under IR35 on one contract can weaken a contractor’s claim to be outside of IR35 when working on other contracts, so for understandable reasons, contractors are less than enthusiastic about accepting contracts under PAYE or umbrella arrangements.
The shift among some employers has led many contractors to now consider whether to continue trading, return to employment or in some extreme cases, even prepare to leave the UK for good!
We have always felt that contractors bring flexibility and a very niche skill set to the contracts that they carry out, giving organisations the scope to flex their abilities as needed. This is especially true where the extra skills are needed for a limited period only. Our feeling is that HMRC do not want companies to avoid their responsibilities as employers, especially regards their tax liabilities, so the days of employing contractors to do the same work as existing staff are well and truly over.
Where contractors are needed to achieve a particular goal, we feel that businesses need to be very clear about what a contractor will be engaged to achieve, ensuring that the aim is clearly defined prior to engagement. If this can be achieved while still respecting the conditions shown above and if mission creep is avoided, then it should still be possible to continue working with contractors outside of IR35.
There will always be a need for contractors, but the market is going to change dramatically. The Recruitment Geeks as a consultancy, works closely with specialist payroll advisors to ensure that we remain compliant and this will not change after April 6th. As a client of The Recruitment Geeks and although the responsibility for determining status moves to your business, we will do our best to make sure that every contract is treated correctly, giving your business as much confidence as possible under the new regime.
Andy leads the Accountancy & Finance Team. Having completed a degree in Accounting and Law at Bournemouth University, he has since had a varied career in both recruitment and teaching.
Clients range from micro enterprises through to Top 50 UK Accountancy practices and with such a strong client base, The Recruitment Geeks is able to attract some of the best candidates available on the market now.