There has been so much noise around IR35 tax that it has always been hard to see the wood from the trees. This is particularly so right now for hirers and agencies as new legislation (to be effective from 6th April 2021) makes them potentially liable for the tax of the contractors they use.
If you are a hirer, not a ‘small company’ and want to use a contractor for some of your work after 6th April, read on as this article proposes a simple, effective and cost free way of dealing with the new rules.
Contrary to the approach taken by many, it doesn’t help to talk about the technical legal stuff. It simply serves to confuse the issue and make it attractive to take up services that, at the end of the day, may expose you to unnecessary risk. Here’s why.
Checking the complex legal aspects involves technical review of legal concepts such as ‘mutuality of obligation’, ‘personal service’, ‘control’, ‘direction’, ‘integration’ and so on. When it comes to considering the steps to take, talk of ‘reasonable care’ as a defence to an HMRC claim abounds, yet reference to a defence should immediately raise concerns. Prevention is better than cure!
If you have the internal expertise to make decisions on status and process, all well and good, but it’s tricky legal ground. Otherwise you may be tempted to outsource to a third party. It’s tricky ground for them too, and with few actual guarantees on offer at the end of it all you could approach that route with caution. You will have to meet their charges and in the long run it is much more likely to expose you to risk than otherwise.
A quick reminder. Risk arises whenever a contractor company (PSC) is paid on a gross basis without PAYE and NICs accounted for to HMRC and a tax investigation commences. This involves more than cost, but management time too. Proceedings can take months if not years to be concluded and, unless all the ducks have been lined up in your favour, there is the possibility of having to pay out unpaid levels of tax and NICs with interest and penalties. Even if you have contractual indemnities in place the experience will not be fulfilling. For these reasons there is little surprise that some hirers will simply refuse to take on PSC contractors come April 2021. The key is to avoid the investigation in the first place.
Fortunately there is an alternative route that is risk and cost free. Follow these simple steps.
Step 1 – Recognise the realities.
Think about what you want to use the contractor for, and then everything else follows, not the other way round.
Forget the tax. This follows the nature of the work and the decisions you make, not the other way round. As soon as you start to adjust anything to reduce tax risk you are creating risk.
Do not think you have to assess actual employment status. There is generally no actual employment status if you use a contractor.
Do not rely on ‘substitution’. Some advisers insist that this is a key factor, but it is not unless it is real, so taking this route is not a silver bullet.
Step 2 – Ask yourself the following three questions:
- Do you need an extra person to do a specific job for a specific purpose?
- Is that person to be responsible for completing that job, rather than just undertaking some temporary work for a period?
- Will that person have autonomy when undertaking the job, such that you will rely on that person getting the work done correctly?
If the answer to all three questions is an unequivocal ‘YES’ you have nearly completed the exercise. To double check that your ‘YES’ answers are right, ask yourself the following two questions:
- Is it your intention to require the extra person to do more or different work over and above the required job?
- Do you expect the person to have to ask you / your line manager what to do and how to do it?
If the answer is an unequivocal ‘NO’ to both questions, you are good to go. There is no reason why you should not hire a contractor, you will avoid a tax investigation and you will not run the risk of having to pay IR35 taxes. You can rely on this advice provided your contract (and any chain contract) reflects the answers with no change to either throughout the hire.
If you cannot answer as above you must accept that there will be risk. You can attempt to offset that risk by using HMRC’s online CEST tool, or another online tool (which may come with a status determination generator as an added bonus to tempt you), by obtaining an independent review (emphasis on independent as a review by an interested party in the chain could be self serving), and by procuring IR35 insurance that provides cover for the NICs and PAYE in certain circumstances. All these come at a cost and with no guarantees, especially if the answers to the questions above are not unequivocal.
This begs the question – why bother to go the risk route when there is no need to, especially as supply agencies can offer non contractor alternatives such as PAYE workers where IR35 is not involved at all?
To round off this very simple but effective advice which shows how you can easily decide if the engagement is IR35 tax safe, there is one last question.
Do you have the right contract to use?
Assuming there will be cases where your answers to the above questions show you can safely use a PSC contractor, you will need a contract ready to use with your contractor (or if you are hiring via an agency, for use with the agency). Reliance on generic supplier terms should be avoided. Put simply, incorrect terms in a contract can raise the risk and even negate your otherwise tax safe position.
Lawspeed has been providing suitable ‘IR35’ contract templates since 2000. Written by our specialist lawyers and used successfully many thousands of times every year since the tax was first introduced, our templates reflect the reality and can be used over and over again.
For more advice, a free telephone consultation about how our services can help you, or for a contract template you can rely upon, call 01273 236236 or email firstname.lastname@example.org.