IR35 Rules Hiring Managers Need to Know About
The role of a contractor in the modern work eco-sphere is complicated, but their contribution to the UK workforce isn’t: contractors are essential.
Using IT as an example, A 2016 research report conducted by Experis positioned the UK as one of the top five countries for IT contractor use, ahead of other leading economies such as the US and China.
But now, things are changing for the UK. There are new IR35 rules being introduced in April 2020 that hiring managers need to know about.
Up until April 2020, it’s been down to the contractor themselves to determine whether they should be paying employed levels of tax.
Now, it’s the ‘end-users’ responsibility to both determine a contractor’s status inside or outside of IR35 and then pay the taxes involved.
Under the new rules, the calculation is, fortunately, much simpler. The fees paid to the contractor called the “direct deemed payment” are to be treated as employment income – which should be handled just like a salary. Then the fee-payer, which is either agency or hirer, has to pay their employment taxes on top – these cannot lawfully be deducted from the contractor’s fees.
So the price for a contractor inside IR35 is there for all to see making it all the more important for
Who Do These Rules Apply to?
Under the proposed changes, the new rules aim to reduce the cost of non-compliance and make it easier for HMRC to monitor and enforce compliance in the future.
The new rules will apply to:
- medium and large businesses in the private sector that are the end-user of the worker’s services,
- the party that pays the contractor, which could be the recruitment agency in some cases
- contractors providing services to medium and large businesses
The IR35 Rules
As a hiring manager, it’s now your duty to know which of your contractors fall inside or outside of IR35.
To do that effectively, you need to be well versed in the IR35 rules and how they apply to contractors.
There are a number of different indicators that determine a contractor’s IR35 status and all of them can be found here. For the sake of this article, we’ve condensed and combined them into ‘rules’ which can be found below:
Rule 1: Control
- Do they work independently?
- Did you set your contractor clear cut and agreed-upon deliverables that are unlikely to change dramatically?
- Does the contractor have specific milestones or tasks to achieve?
- Do you have work start times and end times for your contractor?
- Does the contractor have a line manager or product manager?
- Is the contractor required to work from the office/site?
HMRC is trying to find what they call ‘disguised employees’ contractors who are enjoying the tax relief of being a contractor and the perks of being a full-time employee.
Revenue and Customers will look at how much control you have over your contractor as it paints a picture of how they function within your business.
High levels of control will move the contractor towards being inside IR35 because HMRC will deem that to be identical to an employer/employee relationship and not an employer/contractor relationship.
Rule 2: Access
- Do you supply equipment for the contractor?
- Does the contractor have full access to the office space?
- Will the contractor be attending staff social events?
- Does the contractor receive work perks?
- Can The contractor work remotely?
- Does the Contractor attend regular staff meetings?
HMRC are looking for the relationship between employers and contractors to be transactional, nothing more.
The boundaries of access, and where they lie for your business, can sometimes muddy the waters between determinations.
For some employers, the extension of staff facilities and staff equipment might just seem like a friendly thing to do and, legislation aside, those employers would be right.
Unfortunately, the new and aggressive legislation that has been introduced has made these types of relationships hard to engage in for both client and contractor.
A shame for both parties but the risk of a skewed IR35 determination is too great.
Rule 3: Risk, Obligation & Exclusivity
- If the contractor was to fall below agreed standard of work do they correct the work in their own time and at their own expense?
- Does the contractor expect more work after their initial contract ends?
- Do you have exclusive access to the contractor? Do they only work for you?
- Do you have insurance (professional indemnity) in your own name that implies risk?
Contracting isn’t for everyone.
Between uncertain job security, paying certain fees and taxes independently and the nomad-like lifestyle, risk is part of contracting life.
Sufficient enough risk for HMRC to decide to bring it in as a major determining factor for whether a contractor is inside or outside of IR35.
Any mistakes in the contract must be rectified in the contractor’s own time, and the contract should say this explicitly. Then and only then will HMRC deem there to be enough risk to place the contractor outside of IR35.
Rule 4: Substitution
If a contractor couldn’t make it into work or perform the duties needed of them, is a substitute available and accounted for?
Is a substitute clause written into the contract?
If they genuinely can and on occasion actually do, then there is little doubt that the contract is outside IR35.
But if there is no right of substitution clause, or the client clearly indicates in correspondence, such as emails or in other records, that the contractor should never even consider sending in a substitute, then the contract could fail IR35.
A substitution clause also goes some way towards easing concerns around the exclusivity of the contractor – another aspect looked at by HMRC.
These rules are weighted and built into a report.
If the contractor is more heavily weighted towards being inside IR35, an investigation will be launched.
So, if a worker genuinely has a right to send a substitute in their place, personal service is not required and IR35 will not apply.
Getting your determination right is very important. To this end, many tools have been developed to help contractors and hiring manager’s figure out their determinations and next steps.
Some elements of these rules will raise a few eyebrows. But, what’s important to remember is that HMRC wants a contractor to be made in the image of what they believe a contractor should look like, and that image is neither right or wrong – it just is.
Knowing the rules of what determines a contractor’s IR35 status will make the process smoother for both parties.
We built these rules into a handy checklist, which you can use to run initial audits on your contractor base.
Download it below: