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An IR35 survival guide for employers and contractors
Forthcoming changes to IR35 regulations will affect most private sector companies using IT contractors – so what do you need to do to prepare?
Anyone with even a passing interest in employment law cannot have failed to notice the various employment status cases churning out of the appeal tribunal and courts almost conveyor-belt style over the past few years.
Many of those cases have been high-profile, involving household names and market disruptors – think Uber, Deliveroo and Pimlico Plumbers. Nearly all have been decided in favour of the individuals challenging their status, who have been held to be workers rather than genuinely self-employed.
If this was not enough of an incentive to re-examine and risk-assess the nature of the relationships with contractors and consultants, then chancellor Philip Hammond’s announcement in the Budget that strict IR35 tax rules will apply to private companies from 2020 must be the final nail in the coffin.
As it has been identified that the IT industry is one of the sectors most likely to be affected, both end-user engagers and contractors would be especially wise to sit up and take notice.
In April 2017, public sector organisations assumed responsibility for determining the correct employment status of the contractors they engaged and whether they had to levy tax at source – before that, it was the contractor’s responsibility. Now it is the turn of the private sector. While we are told small businesses will be exempt, we have yet to receive guidance on how this will be defined.
We are also told that, because the changes don’t take effect until April 2020, there is plenty of time to comply. Given the uncertainty arising form the dreaded “B word” and attention being focused elsewhere, that time may slip away quickly.
Inevitably, there is already much lobbying in opposition to the changes, but as HM Revenue & Customs (HMRC) expects to generate just over £3bn in the initial five-year forecast, it would be surprising if anything changed.
The reality is that the rules around off-payroll working and correctly assessing employment status are fiendishly complex – not least as we continue to have to fit modern working practices into old-fashioned employment laws. If you toss into the mix the fact that each individual case must be assessed on its own context and background, the task can seem overwhelming. So the time to act is now.
Suggested steps for businesses
Carry out some basic due diligence on the contractor and consultant relationships you have. How many do you engage and how do they operate? If you have any individuals providing services via a personal service company, you could potentially be caught by IR35 from April 2020.
Even if you do not, but you have contractors or consultants providing services directly, it would still be prudent to run through the following steps. They could still ultimately be found to be workers, or even employees, for employment law rather than tax purposes, which brings with it associated rights, for example to claim unfair dismissal, the national minimum wage and holiday entitlement.
Carefully examine the contractor contract that has been entered into and regulates the relationship – hopefully there is one. What do the key terms say about how the relationship is envisaged to operate? What protections, if any, do you have with regard to their employment status and if tax were to be levied? If your contract does not make such provisions, this is should be rectified.
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Then examine the reality of how the relationship works in practice. Speak to the managers who work with the contractor, check the admin processes and look back over past interactions.
If the reality is different to what the contract envisages, that could be a problem both practically and legally – HMRC and the employment tribunals will readily look beyond the documents to what happens in practice.
Apply some of the key tests that HMRC and/or an employment tribunal would use when assessing status and begin to build a picture. There is a government tool that can provide some basic help, but this is not a substitute for taking advice and has limitations because you have to provide answers within the parameters set. These are not always comprehensive.
There are number of potential red flags to look out for. These include but are not limited to:
- Can the individual contractor provided by the service company appoint a substitute to do the work and, if so, is that right limited?
- Does the contractor carry any potential risk or liability as part of the relationship?
- How much control is exercised by the end-user over the work and how it is carried out?
- Who provides the equipment used by the contractor? How integrated is the contractor in the business?
In short, there is a lot to think about, but it would be wise to build up a complete picture. Remember that, technically, this needs to be done for each contractor relationship.
If there is a risk arising, it would generally be best to tackle this head-on. Speak to the contractor and see how, if at all, this can be mitigated. Can changes be made to the relationship to make it more akin to self-employment and therefore outside IR35? If so, the documentation entered into should also be updated.
If changes cannot be agreed and the risk remains, you may have a tough decision to make as to your future engagement with the contractor. As relationships tend to develop and evolve, especially if new projects are started, it must always be remembered that this is an ongoing obligation.
Finally, educating managers and those that procure the services of contractors as to best practice is crucial to head problems off at the pass.
Suggested steps for contractors
Rather than face a nasty surprise when, post-April 2020, you find tax has been levied by the company you contract with, it would be preferable to carry out your own risk assessment following similar steps to those above to determine how the relationship could be viewed.
Whatever the outcome, it must be better to engage with the end-user now as to their likely view, so that any concerns can be tackled in the open and before your engagement could potentially be terminated.
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