Contractors working under limited companies will often ask if a contract sits outside or inside IR35. In the public sector, there is already legislation in place to ensure the responsibility of being inside or outside IR35 is down to the client and this is set to extend to the private sector by 2020.
What exactly does this mean?
The IR35 legislation has been brought into place to reduce the number of tax avoidance issues between contractors and clients. It affects contractors who work under a limited company or other intermediary. HMRC believe that some contractors are working under a limited company but are basically working in the same way as an employee. If you are outside IR35, you are operating as a genuine business.
Effects on businesses
Although some businesses can be somewhat “creative” with their practices, there are businesses who are genuinely worried that they have been employing contractors inside IR35, without knowing it. In some cases, this could mean they have some potentially hefty fines ahead of them. These are some points to consider when determining whether the contractor is inside or outside IR35.
Are you contracting for a service?
A contract for a service is substitutable, therefore, you should be willing to allow your contractor to provide a substitute to carry out the work, if the work is outside IR35. If the contractor is required to perform the work themselves, HMRC are likely to view this as falling inside IR35, as your contractor is being treated as an employee, rather than a service. The reality is that many clients have no idea what the contractor’s limited company is, as they only ever deal with the individual. The way HMRC view it is that you should be hiring the business, not the individual, if you wish to operate outside IR35.
What do your internal processes look like?
If the internal processes used by the contractor are the same as the employee, this could be viewed as being inside IR35. This may mean similar security badges, level of access to systems etc. If you can’t distinguish between the internal processes, it could be argued that your contractor is operating inside IR35, rather than an external business.
What level of control do you operate?
If a contractor is working outside IR35, they should not be under the same supervision and direction as employees. Contractors operating as a business would generally set their own working hours and would be responsible for their own workload and direction. This is something to be very careful with and this is where businesses tend to slip up. Most businesses treat contractors in the same way as employees and this is likely to be picked up by HMRC.
What terms do you have?
If you expect your contracted worker to work only with you and no other clients, they are operating inside IR35. The same goes for contractors who are being paid benefits, such as holiday pay, sick pay and pensions. If you are supplying all the equipment to the contractor, this is another aspect HMRC will be looking out for.
Our view to outside IR35 compliance
The lines between contractor and employee can be quite blurry, but it is important to understand the difference. In order to comply with the off payroll working law, we suggest businesses look at IR35 compliance as business continuity planning. The obligation of service continuity should be placed on the limited company contractor. As the off-payroll regulations will be extended to the private sector in 2020, it is time for medium and large organisations to get their business continuity planning in place.
Making sure that you are contracting for services, and not simply a person, is also good housekeeping. Bear in mind that any measure you as an employer put in place has very limited future proofing. i.e. there is nothing stopping HMRC from opening an investigation regardless of whether you think you took reasonable care and had adequate measures in place.
If you are employer wanting to learn from our public sector experience – we would be happy to engage. Drop us an email at firstname.lastname@example.org.