Posted on 25/01/2021 by Joseph Treacy
Guest blog written by Lawspeed
New IR35 "off-payroll" rules take effect from the 6th April 2021. These introduce responsibilities for assessing tax/employment status and, in some cases, requirements to account to HMRC for tax and national insurance where hiring individuals that operate through their own businesses (Contractors). This article explains how to make the assessment simple, effective and cost free.
The changes mean that all hirers, except small business hirers (t/o less than £10.2m, < 50 employees, profits < £4.5m), must assess the tax status of the hire arrangement. The question is whether the Contractor can be paid gross (the norm until 6th April) or net of PAYE and NICs as if the intermediary business were an employee (this plus employer NICs). The rules apply whether a business engages directly with the Contractor’s company, or there is an agency in the supply chain.
The assessment is often regarded as difficult because it requires a review of the working relationship using tests that are similar to assessing employment status, as if the individual doing the work were working direct for the hirer. Although this may appear odd, HMRC is of the view that individuals should not be able to take advantage of tax breaks available to their businesses if they work in the same way as the hirer's regular employees.
Given that view and the noise around this issue, it is easy to be persuaded that assessment must require a review of complex legal concepts such as ‘mutuality of obligation’, ‘personal service’, ‘control’, ‘direction’, ‘integration’ and taking 'reasonable care'. The contractor industry is full of advice in this area, yet relying upon this approach is a bit like going into a darkened room with your eyes partially closed. You need a flashlight. There is a myriad of seemingly attractive and ‘quick fix’ flashlights in the market, potentially with a good deal of risk attached. Does it need to be that complex?
There is a route that is risk and cost free. If you follow these simple steps and clear your mind of the noise in the industry, the solution is clear.
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 only if the individual will be required to work as if they were just a temporary employee, which in turn 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 rely on ‘substitution’. Some advisers insist that this is a key factor, but it is not unless the ability for the contractor business to substitute the individual with someone else is real and acted upon; which is rarely the case. So taking this route is usually 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 without hesitation an unequivocal ‘YES’, you have nearly completed the exercise. If there is some doubt, think through why you need that extra person and check the position with HR or your procurement team.
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?
There is no magic in these questions. If the answer to the last two is an unequivocal ‘NO’ to both, 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 might have more work after the specific job for a specific purpose is completed, it makes no difference so long as the answers are unqualified.
Also key to the above is having the right contract to use. Incorrect terms which are at odds with the answers can induce risk and a tax investigation. For this reason, it is important that the contracts in place, whether direct with the contractor business or set up through your recruitment supply agency, are bespoke to the engagement. Standard supplier terms, unless created for the purpose, should be avoided at all costs.
Save where you have the right answers and contracts in place, 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, by obtaining an independent review, or procuring insurance cover. However, all these 'solutions' come at a cost and with no guarantees, especially if the answers to the questions above are not unqualified.
However, as your agency will be able to offer non contractor alternatives, such as PAYE or umbrella workers where IR35 is not involved at all, you could use those services and avoid the entire issue altogether.
This article is written by Lawspeed – staffing industry recruitment and employment law specialists – for IR35 contracts and advice call 01273 236236 or firstname.lastname@example.org. This article is not intended to replace formal legal advice.