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Wednesday, March 4, 2020
As the responsibility of policing the tax liabilities of consultants moves to the “fee-paying” client and broadens from public to now include private businesses we thought it timely to look at the practicalities and IR35 compliance. We would, of course, advise all our readers to take professional advice when putting new policies and procedures in place and the following is simply a suggested guide to assist in efforts to remain compliant.
IR35 Background
The somewhat controversial and often ambiguous IR35 rules are subject of a revision following HMRC’s consultation which closed 19th February. In very simple terms the IR35 rules seek to prevent contractors, often working through Personal Service Companies (PSC), from paying less tax and NICs than similarly positioned employees.
Contractors themselves had been responsible for determining their liability however since 2017, public sector employers were given the direct responsibility for this task. In a move to unify the rules responsibility for accounting for tax and national insurance for non-public sector contractors will now also include private companies as the party who pays for the individual’s services, known as the ‘fee-payer’. This will apply IF they are a business with:
- More than 50 employees
- An annual turnover over £10.2 million
- A balance sheet worth over £5.1 million
What are the risks?
Liability is now resting with organisations directly engaging contractors, specifically those companies who meet the above threshold criteria. It is these end clients that now face a financial risk if consultants engaged are found to be incorrectly classified or determined. The responsibility for determining whether a contractor is ‘inside’ or ‘outside’ scope rests with the organisation paying the fees and therefore they must be certain of their assessments.
Financial risk to your organisation (not qualifying criteria)
If you have incorrectly determined a consultant as a contractor not subject to NIC and tax collected via your organisation, you – the end client, will be responsible if HMRC finds contractors to have been incorrectly determined. The consequences if engaged directly by your business is that you as the end client will face potential tax / National Insurance losses. If the contractor is paid by an agency and supplied by them, they will face the financial risk.
Other risks
The change in liability has created concern within the contractor world. Agencies and independent consultants/ contractors are reviewing or have already decided on alternative income options. It is therefore likely that the supply of suitably qualified contractors may not be as readily available as before. Wherever possible you should allow for suitable forward planning to secure contractors for projects.
Are they a limited company or a sole trader? – Do contractors work through their own Personal Service Company (PSC) or agency? If the consultant operates as a sole trader, it can be viewed by HMRC as not being sufficiently distinct. It’s not a deal-breaker to be a sole trader but certainly preferable to select a consultant with their own Ltd or LLP business, this offers a clearly distinct financial and risk-based relationship with the hiring organisation.
Job specification and Terms & Conditions – Be sure to create an accurate consultancy job description and contract that reflects the role, responsibilities and outcomes expected. This should be sufficiently distinct from any existing employment positions. To assist in dealing with any HMRC query, it may be worthwhile proactively setting out those differences to employee specifications and holding them on file. Examples include the obvious aspects of employment terms such as holiday allowances, pension, sick pay. Be sure to classify the working relationship as one of an independent supplier to your organisation.
Due diligence – Review candidates past two, full tax years of engagements to be sure they are classified as an independent contractor by HMRC. This should highlight the variety of income from a number of clients and support their self-employed status.
References – Following the same logic as securing references for new full or part-time employee recruits be sure to request testimonials from their last three engagements.
Tools for the Job – Typically an IR35 compliant consultant should arrive fully self-sufficient including own transport, technology (laptop) and smartphone. These all point to independence and a positive sign as far as HMRC will be concerned but be sure they still comply with company policies such as cybersecurity when using their own tech.
Consistency in Acts and Communication – Having all the onboarding paperwork neatly defined meets one level of compliance but if the “day to day” engagement starts to drift into more of an employee to employer relationship you could be in danger of tripping up. Be sure to retain all notes of communication, e-mail, WhatsApp and social media posts should retain clear distance from that of an employee and avoid exhibiting a level of control that goes beyond that of a consultant relationship.
If you have any queries or concerns relating to IR35 or a general enquiry regarding the hiring of contractors please contact us… Call Robert Gibson or Sally Lomas Fletcher on 0191 2328451 or e-mail sallyfletcher@samuelphillips.co.uk
Written by Robert Gibson, Senior Consultant - Employment Law
Robert is a Senior Consultant at Samuel Phillips and specialises in employment and business matters. He advises in relation to employment and shareholder disputes, including pensions and related issues.
