About a year back, new IR35 rules transferred the onus of responsibility in public sector contracting from the contractor to the client. Effectively, it meant that the act of determining if a contract was inside the IR35 rules or outside of it, rested with the client. This also resulted in the clients being entrusted with the responsibility of making the deductions and remitting the same to the HMRC, in addition to National Insurance Contributions. This does not bode well for any contractor who establishes a public sector limited company to offer services without any tax motivated incorporation. Here are a few steps that can be taken by a contractor to ensure that he does not end up being considered as within the IR 35.
The Employment Status Service Tool of the HMRC which has been relied upon by public sector undertakings to ascertain if a contractor falls within the IR35 may not be the best solution after all. There are three results that will be the outcome of the evaluation by the tool – pass or fail or marginal. However, the tool is designed in a such a manner where it would be difficult for most genuine contractors to pass. HMRC uses the tool to determine if a contract falls within the IR35, but a public sector company is not bound legally to use or rely on the tool. This should effectively be the first step taken by a contractor – informing and convincing the client that a determination of the status of a contract need not be carried out by the ESS tool.
A contractor who has managed to convince his client that the HMRC ESS Tool is not the only way to assess a contract, needs to get a comprehensive review to support claims. It is necessary to opt for a contractor calculator and contractor tax calculator service as part of the IR 35 review to establish that the contract is legitimate. Every contractor needs to build up a reasonable amount of evidence that can support claims that the contract is legitimate and not motivated by tax evasion. This begins with a comprehensive review carried out by a qualified and experienced agency which will also be in a position to offer recommendations on what needs to be done to get the contract inside the ‘pass’ category, legally.
Depending on the outcome of the professional IR35 review service, it may sometimes be necessary for the contractual terms and clauses to be reworked and renegotiated. A contractor should, on the basis of the recommendations of the review, initiate negotiations with the client to make the contract more compliant and take it outside of IR35 if any of the existing clauses need change. Effectively, this means that if the working practices and the terms of the contract create a perception that the contractor is more like an employee, it needs to be corrected. The contract should prove the contractor and client are in a relationship that is purely contractual, and not any form of disguised employment or tax motivated company incorporation.
Clients may sometimes take the easier option of applying the ESS tool blindly and making the deductions and contributions. Public sector contracting can be tricky as a result of the new rules which lay the responsibility with the clients who may then proceed to choose the easiest option, rather than having to answer questions. However, not many are aware of other implications and regulations such as the AWR or Agency Workers Regulations which means that holiday pay and other facilities need to be offered to those who fall within IR35 contracts. A contractor can inform the client about the legitimate nature of the contract, and the compliance aspect, and the fact that inside IR35 contracts come with certain responsibilities.
While the responsibility has changed hands, other major requirements are the same. For instance, the MOO (Mutuality of Obligation), the SDC (Supervision Direction Control) and rights to substation are the same as earlier. A contractor needs to ensure that the contracts are outside the IR35 by looking at the various key indicators that are used to evaluate and assess if a contract is within the IR35 or outside of it. Since the key indicators have remained unchanged the approach should also remain the same. For instance, it is necessary to prove that the client does not exercise control over the contractor the way a employer controls an employee. This could be in the working hours, the place of work, the manner in which time-offs are intimated. These are all important aspects that need to be worked out after carefully looking at the working practices of clients to confirm that the terms of the contract are indeed different from the terns of employment.
One of the biggest points that will come to your defence if an adverse determination slots you into the inside IR35 contract, is the number of clients who use your services. You need to maintain records that prove beyond doubt that your services are used by many clients. The contracts that you have with different clients should more or less be the same, save for a few changes, which will show that you have a uniform contract when offering services to clients. This is a lot different from having different contracts which more or less are similar to employment terms laid down by a public sector limited company.
Contractors need to be aware of certain aspects that differentiate employment from a contract. For instance, a contractor who offers services to one or multiple entities, would develop his or her skills through own resources. Effectively, this means that a contractor would not be a part of a training program that is conducted by a company or a client. Other than discussions or sessions where the requirements are shared, a contractor would not be a part of training, learning and development programs offered by the company. This applies to training that is either paid or unpaid. And contractors will not be a part of any efforts to carry out appraisal of the performances of employees of the client, regardless of the extent of close liaison or the interaction for the purpose of execution of contractual obligations.
Contractors with legitimate company incorporations need to not only look at contractor calculator requirements but should also put together documentation and work towards compliance to remain outside IR 35. One of the key aspects that need to be considered is insurance. An employee will automatically be covered by insurance taken out by his or her employer. But in the case of a professional who offers services as a contractor, it is necessary that the professional is covered by insurance and indemnity. The insurance needs to be taken in the name of the company which is incorporated. This will prove that the incorporation is legitimate and not solely motivated by tax considerations.
One of the most important aspects that will serve to identify you as a contractor is the ability to differentiate yourself and your services as being different from that of the client. If your services appear to be a part of the regular processes of a company, then it is natural that your services will be deemed as disguised employment. Therefore, you need to take sufficient care to prove that your services contribute to the company, but are not a part of the processes that make you similar to that of an employee. There are many options that can be used to prove distinct identity, and contractors need to understand that not only are they separate entities, they need to show that they are separate.
Contractors who offer services to public sector need to be prepared to deal with clients who will try to choose the easier option of deploying the HMRC tool to determine IR35 status. By following the options mentioned above and by using the services of a qualified, experienced and certified accountant and reviewing service, it is possible to stay outside of IR35 contracts, legitimately. Usage of the contractor tax calculator will be a good option to understand the implications and the extent of tax exposure that will ensue.
IR35 for private sector is the same and unchanged, for now. If the indications are anything to go by, then it is possible that the same may be applied to the private sector also and IR35 for private sector may also end up with the responsibility changing hands from the contractor to the clients or recruitment agency. However, it is too premature to make predictions or observations of any unannounced policy, despite the fact that there are indications.