Consistent with our philosophy of sharing information, knowledge and experience for the benefits of our clients, candidates and colleagues, we are pleased to provide key highlights of IR35 from a recruiter’s perspective. Also, we will try to make suggestions on how we intend to assist our Clients and Candidates with a view to ensuring that they are not caught unwares.
- First introduced in 2000 and is designed to reduce tax avoidance by workers and the firms hiring them who are supplying their services to clients via an intermediary such as Limited Company but who would be an employee if the intermediary were not used.
- In some cases, it is higher level experts who follow the contracting route.
- Basic IR35 Rules:
- Mutuality of obligation: Working as a self-employed contractor means you can work in a project-by-project basis without any obligation to continue working for that client once the contract comes to an end. Equally, clients are under no obligation to continue offering you contracts once the project you’re working on is complete. If a client is obliged to offer you paid work and you’re obliged to take it, this is an example of a contract of employment, meaning you fall within IR35. Also, if a contract states that you can’t take on other clients while working for them, this also places you within IR35.
- Substitution: If a contract states that the client wants you, and only you, to see a job through from start to finish, then this working relationship will fall within IR35 rules. For a contract to fall outside of IR35 it should highlight that the substitute workers you put forward can complete the contract work on your behalf instead.
- Supervision, direction, control: Contractors must have control over how they complete their work for a contract to fall outside of IR35. If a contract sets working patterns and the client provides excessive input over how work is completed, then it’s likely that this will fall under employment rather than contract work. Keep in mind that if you’re also completing tasks for a client in addition to the contract services you’re already providing, the contract is likely to fall within IR35 too.
If the contractor passes the test, they are 'outside' of IR35 rules, and can continue to invoice then pay themselves through their own limited company. If they are deemed 'inside' IR35 and HMRC declares that it’s an employment relationship, then tax and National Insurance will be deducted from their earnings and the liability for any missing tax lies with them.
IR35 checklist: test your employment status
How you’re paid
To stay outside of IR35, self-employed contract workers tend to be paid on a project-by-project basis, which is usually when work reaches a specific milestone or comes to an end.
Running a business of your own accord
Having a website, dedicated office space and employees all goes in your favour of showing that you’re running your business of your own accord. This reinforces that you’re operating as a self-employed contractor and not offering the services you provide as an employee.
Contractors must have control over how they complete their work for a contract to fall outside of IR35. If a contract sets working patterns and the client provides excessive input over how work is completed, then it’s likely that this will fall under employment rather than contract work. Keep in mind that if you’re also completing tasks for a client in addition to the contract services you’re already providing, the contract is likely to fall within IR35 too.
The equipment you use
If a client provides you with equipment to complete a contract, and you don’t use your own, this could result in HMRC viewing you as a disguised employee. Whenever you’re at the pre-agreement stages of a contract, always make it clear that you’ll be using your own equipment while working to remain outside of IR35, otherwise it could make working out your employment status more difficult.
Contractor remains separate from client business
If a contractor becomes an integral part of a business’s structure, such as having managing employees who report into them, this indicates an employee status as opposed to self-employment.
One of the major perks of being a self-employed contractor is that you can work for more than one client at once. However, if you’re deemed to be working exclusively for one client only over a prolonged period of time, HMRC could view this as an employee-employer relationship, meaning you fall within IR35.
Self-employed contractors are likelier to experience a higher level of financial risk than an employee would as they have to invest their money into the everyday running of their business. If a client deems work faulty or substandard, putting things to right is a simple way for contractors to demonstrate their exposure to financial risk and a strong indication that they are in business of their own account.
Legislation which was delayed from April 2020 is coming into effect from April 2021 – there is a shifting responsibility for assessing whether IR35 applies onto the private sector end user (our clients) of the worker’s (our contractors) services, for all payments by medium and large businesses from 6 April 2020. Where it is concluded by the end client that IR35 applies, the fee payer (in this case agency) will become responsible for accounting for and paying the related tax and NIC, including the additional cost of employer’s NIC, to HMRC.
The new rules have the intention of ensuring that individuals who are working like employees but who operate via an intermediary, such as a Personal Service Company (PSC), pay broadly the same tax and National Insurance Contributions (NIC) as an employee would. The rules only apply to medium to large companies. More information can be found at: Prepare for changes to the off-payroll working rules (IR35) for clients - GOV.UK (www.gov.uk)
Our (Antal) Role on how to help/assist Clients & Candidates:
Assessing IR35 status is complex. It involves undertaking and for clients who hire large numbers of contractors it will require considerable time and resource to assess them all correctly. Blanket decisions, tempting as they might be, are a bad idea, and sourcing the necessary expertise could be a challenge in itself.
So, what should we (Antal) be doing in order to protect and assist our clients?
Beyond placement of candidates to our Clients for advised roles as well as helping candidates to land their dream jobs, we wish to recommend / suggest as follows:
- Involve compliance experts: Best advice will vary depending on client’s business and how they run it, and it will take specialist compliance experts to correctly assess the situation and advise. We can assist our Clients by hiring and training such experts, or partner with a specialist.
- We encourage contractors to get professional IR35 assessments: It’s more important for every contractor to know and understand their own IR35 status. Where contractors have access to independent IR35 assessment, they’re more likely to be reporting the correct status already, and to have evidence available to support that status. This reduces the risk for our clients, and will make it easier to conduct their own assessments if/when they need to.
- We will strife to open candid lines of communication between contractors and clients, and the sooner they start talking to each other about IR35 the easier it will be to resolve any issues to their advantage.
- In conjunction with compliance expert, we are in a position to continuously brief our clients and contractors on the implication of IR35 to their Businesses so that they can take a proactive and deliberate action.
- Terms of engagement of Contractors by Clients should very clear without any ambiguity.
- Where Contractors (Candidates) are engaged by Clients and are restricted to work for them alone for the entire duration of the project, it is advised that such contractors be treated in their payroll to allow necessary returns-PAYE and NIC TO HMRC
- If equipments used to deliver the project are provided by the Client, then the Contractor is not IR35 exempt.
We always recommend you liaise with your accountant on financial matters and to ensure you follow the correct process. There are changes to IR35 on a periodic basis, so it is important to keep track of these and have up to date advice.
This blog falls under a knowledge sharing series – we are often asked to explain these topics to candidates as a first step to entering the contracting market. We are keen to raise awareness regarding a vast array of subject matter as we strife to ensure that all our clients, candidates, colleagues, and prospects are continually informed based on market intelligence at our disposal.