What is IR35?
The IR35 legislation or ‘off-payroll working rules’ (in Chapter 8 of Part 2 of ITEPA 2003) were introduced to crack down on a particular form of tax avoidance whereby individuals would seek to avoid paying employee income tax and national insurance contributions by supplying their services through an intermediary. An intermediary will usually be the worker’s own personal service company or a partnership, for example Jane Doe invoicing for her own services through JaneDoe Limited. The terms “IR35” and “off-payroll working” are commonly used interchangeably because they both relate to legislation that governs the tax treatment of the provision of a worker’s services through an intermediary.
Where the company has an individual frequently providing services through an intermediary, the off-payroll rules require the intermediary (usually a personal service company (PSC)) to determine whether the worker would have been a deemed employee of the end-user client if the intermediary was not present. If they should be deemed employee, the fee payer (usually the end user/client but it can sometimes be an agency) must operate payroll and make deductions for income tax and national insurance contributions, and pay employer’s national insurance contributions on the fees received for the services. The fee can still be paid to the intermediary company, but this will be net of Income tax and National Insurance deductions.
Many of our clients use consultants within their businesses to provide either business services, or to meet the needs of their clients and customers, some on a self-employed basis and some which operate through an intermediary. Employment status, and the IR35 rules/off payroll rules, are therefore a substantial risk that needs to be managed.
The rules are different depending on the size of the client’s business but if you are obliged to carry out an assessment, assessments must be carried out on a case-by-case basis.[/vc_column_text][vc_message color=”info” message_box_style=”solid-icon”]For a free IR35 audit and to talk to us about getting the right contracts in place, please contact us on 0114 303 2300 or [email protected].[/vc_message][vc_column_text]
How can I reduce the risk?
It is important that the contracts are drafted (legitimately and genuinely) to reduce the risk of IR35 applying. Although, these contractual arrangements must reflect the actual working relationship between the worker and client (and it is important to remember that this might change over time too).
We would recommend that there are two key contracts to have in place:
1. A contract between the intermediary and the client
This refers to the business-to-business contract with between the client and the intermediary company.
Contracts should be drafted carefully in order to reduce risk. In a business relationship falling outside of the rules, we would expect to see clauses such as a right of substitution, avoiding obligations to provide and accept work, including a right to cancel without or with very minimal notice, avoiding guaranteeing a minimum amount of work, and avoiding or minimising restricting the worker’s right to work for others. Contracts should also, if possible, be structured by reference to completion of a project or piece of work, rather than by duration. Payment should ideally be structured by reference to completion of a project, rather than time worked. We also recommend that the contract should incorporate some element of financial risk and reward (other than payment of fees) too.
Of course, all of the above points need to be weighed against the commercial requirements of the contract in question. However, if the situation does require, for example, an obligation of personal service, then it should be appreciated that this may bring some IR35 risk with it.
2. Contract between the worker and intermediary business
Although less important than the contract with the client, it is still important to put an employment contract in place between the worker and the service company for example this would be a contract between JaneDoe Limited and Jane Doe. The key consideration with the employment contract is to ensure that it is not linked too closely to one particular client.
Therefore, the worker should be obliged to provide services to whatever clients the intermediary requires. Clearly, if the worker is only obliged to provide services to one client, this will point towards IR35 rules applying.
The contract should also avoid linking the amount of salary and benefits to the fees received from the client the worker is providing services to. Ideally the worker should be paid a meaningful salary, at least roughly in line with market rates which would then be subject to PAYE as opposed to payment of dividends with only a very small salary paid to the worker.
The contract should also specify that the worker will be subject to the control and direction of the intermediary (rather than the client to which it is providing services), for example, the contract should provide that any disciplinary and grievance matters will be dealt with by the intermediary. The same goes for matters such as annual leave.
Self-employed contractors
It is still perfectly fine to use directly self-employed individuals to provide services to a business or its clients, however there are employment status risks with this type of engagement too and it is crucial that the circumstances surrounding the use of self-employed individuals are regularly assessed to ensure that they meet the definition of self-employment as opposed to a worker or employee who both have increased employment rights. Secondly, having the correct contract to document the engagement will help to regulate the way that the parties work together and will reduce risks in the event of a HMRC inspection, or dispute between the parties regarding employment status.
What happens if we get it wrong?
If you incorrectly apply the IR35 rules or your determination is found to be incorrect then you may receive a penalty from HMRC. If you are able to demonstrate that you have exercised reasonable care in applying the rules then HMRC will not issue a penalty.
Incorrect contracts and employment status determinations could also lead to employment tribunal claims for unfair dismissal, failure to pay holiday pay, minimum wage, pension contributions and sick pay claims to name a few. We have seen a rise in these types of disputes and claims and can take steps to minimise the risks to your company.[/vc_column_text][vc_column_text]
How can we help you?
This is just a very brief overview, and our team of specialists would be happy to speak to you about your own individual needs and circumstances. We have already provided advice to a large number of businesses to reduce their IR35 risks or in some cases, restructure their set up in order to be compliant with both IR35 and to firmly establish the employment status of their workers.[/vc_column_text][vc_btn title=”For a free IR35 audit and to talk to us about getting the right contracts in place, please contact us on 0114 303 2300 or [email protected]” style=”custom” custom_background=”#11467a” custom_text=”#ffffff” size=”lg” align=”center” i_align=”right” i_icon_fontawesome=”fa fa-mouse-pointer” add_icon=”true” link=”url:https%3A%2F%2Fbhayanilaw.co.uk%2Fcontact-us%2F|||”][/vc_column][/vc_row]
