On 1st December we published an article ‘IR35 – made easy’, in which we set out 5 questions to ask about the job requirement. If all are answered correctly we said there is no risk of being required to pay IR35 tax from April 2021. However if the answers are qualified, then risk will arise.
This article looks at how to address that risk on the assumption that the parties still (regardless of the risk) want to engage a contractor operating through a PSC or other intermediary.
To reiterate, from April 2021, unless the hirer is classed as a small company or one with no UK connection, responsibility for assessing whether an engagement falls inside (must pay as deemed employment income) or outside of IR35 (can pay gross) will fall on the hirer. All the elements we indicated in our last article as being complex and legal will need to be considered. What help is there to hand?
Starting with our 5 questions, ask yourself why you cannot answer the questions with certainty such that IR35 definitely will not apply. Having identified the reason or reasons (let’s call these ‘the Issues’), is it possible to adjust the arrangements you have in mind to be able to give unambiguous and appropriate answers? If not, step 2 would be to seek advice on the Issues. Is it your plan to hire someone for a fixed period, possibly with more work in mind for the right person, or is it simply you are not sure whether the work is genuinely a project?
Advice on the Issues can only be given after considering all the proposed arrangements. The contracts will be key and should reflect the arrangements, so what would the adviser be looking for apart from just the engagement contract?
Just because someone is working alongside another regular member of staff does not mean that IR35 would always apply. For a start, the regular member of staff will inevitably be hired on different employment terms, usually with a whole host of continuity clauses. If drafted correctly, your contractor terms should be completely different, not just setting out a limit on time (which can be unhelpful), but stating the deliverables expected with no potential in the contract for continuing engagement thereafter. Again, this does not mean that more work cannot be offered at the end – how often do we use quality contractors for one job, e.g. build a database, and then realise they have the right skills for another project that crops up? If you get a plumber in to fix the kitchen sink, and then at the end ask him/her if she would quote for installing a new boiler, you would not expect anyone to say that the plumber is a deemed employee. Give that plumber 9 months of work without a description though and HMRC might classify it as deemed employment (of course IR35 does not apply to domestic plumbing work under the new rules).
What about statements of work, namely one piece of work after another for the same contractor. Could that be seen as a disguised arrangement? Possibly. SoWs as they are known are by no means a silver bullet and can lure the unwary into taking on risk that is unnecessary. All the ducks need lining up.
Obtaining a quote or cost estimate is pretty important especially for longer term work. HMRC is unlikely to challenge a one day hire but may well look at 3 month hires or even shorter. A quote requires a proper description of the work and deliverables, recorded in the contracts. In the contracting world quotes are not generally given, but why not? They support a business profile. However, hirers will always give a rate and it’s only one step on to press for a price and estimated length of time to complete the project, which can work as an agreed estimate or accepted quote.
Without a price, the risk profile goes to high level warning and you can expect taxes to follow. Regardless of what the contracts state, in this case the hirer should issue a statement (required by the tax legislation) that IR35 status applies and the person paying the intermediary should pay as if the intermediary were a PAYE worker, i.e. net.
What if the position is still not clear after having answered the 5 questions and followed this guidance?
In these circumstances many would be backing away from risk. Sensibly, a risk averse hirer will either insist on not using a contractor, or insist on the agency being entirely responsible, or possibly both. Responsibility is usually for dealing with a tax investigation, paying all unpaid tax with interest and penalties that follow and responsibility for indemnifying the hirer against all costs and liabilities it incurs. Quite a burden.
Some agencies may find that risk acceptable and set off liability by obtaining insurance, if available, after using an online assessment tool. The online tools we have reviewed have a swingometer or colour graphic ranging from red (highest risk, IR35 applies) to green (lowest risk, IR35 doesn’t apply). So a pretty certain position at either end of the spectrum, but questionable position otherwise. What if it’s in the middle?
None of the tools, even HMRC’s CEST, guarantee a safe outcome, and insurance policies are notorious for get-out clauses. Even if assessment and insurance is available, there’s no such thing as a free lunch. These services (not CEST) cost money, so is it well spent? Hirers and agencies tempted by this route would do well to also consider the hassle factor if HMRC comes a-hunting, as well as for agencies the potential impact on hirer confidence, since the hirer will always be caught up in an HMRC investigation. In our experience through representing clients, investigations can take years to resolve and be quite debilitating.
Perhaps obtaining a traditional independent contract review seems attractive? Whether or not linked to an insurance policy, remember you get what you pay for. Reviews costing a low amount will likely not be done on any basis other than a tick box approach, frowned on by the courts. A proper review takes time and should consider all factors including the contract (or both contracts if an agency is involved). Again from experience, this is not a 30 minute task. Whilst this may be justified in important cases where hiring a specific contractor may be key, where the 5 questions cannot be answered unambiguously (if they can, then no need for a review) it would be better to have a review of the specific Issues referred to earlier in this article rather than a full arrangement review.
Substitution is still being talked about as a panacea, but relying on a clause to avoid thousands of pounds of tax liability seems dangerous. It has never worked on its own and often doesn’t live in the real world. Treat the idea as a flag for a high risk arrangement.
On final analysis engaging a contractor through an intermediary paid on a gross basis under these rules is risky wherever the position is not crystal clear. Use our 5 questions to identify risk or no risk. Don’t forget to keep monitoring as risk arises if there is change during an assignment, and on extensions of assignment. Wherever the position is qualified there is no doubting that the easiest way to avoid IR35 tax liability is to ensure the intermediary is paid by way of deemed employment income (i.e. net), after taking into account the NIC obligations. Another alternative is to refuse to engage a contractor other than on a PAYE contract. In either case the easiest way to avoid employment rights arising is to hire the contractor by supply through a recruitment business that has not thrown caution to the wind and knows what it is about.
As in our article ‘IR35 made easy’ we have not included any comment about the complex legal terminologies (mutuality of obligation, control, etc) that only serve to confuse, albeit we would be delighted to discuss with any compliance, contract or legal in house advisers interested in IR35.
For more on IR35 and contracts required for outside IR35 arrangements, review of project descriptions or alternative forms of contract (e.g. PAYE and protective umbrella terms) contact Lawspeed on 01273 236236 or firstname.lastname@example.org.