How to ensure your contractors remain outside IR35

22 Jun 2022

Although the government implemented it later than planned, the IR35 off-payroll regulation eventually went ahead in April 2021. The IR35 rule was introduced to prevent contractors from using their limited company or sole trader status to pay less tax and national insurance. In simple terms, it is designed to crack down on contractors working as an employee but under the guise of a contractor.

Are you affected by IR35?

There are several reasons why you might decide to use a contractor. You might only have a short-term need or want the flexibility of ending the contractor whenever you want. Contractors usually work on multiple projects with different clients and often prefer this flexibility to a permanent role. Due to the UK government believing that a significant number of workers were using their contractor status to exploit the tax system, IR35 was introduced. Small businesses with less than £10.1 million annual turnover and fewer than 50 employees are exempt from the IR35 regulation.
The IR35 changes in themselves can seem quite complex. These are the general rules on IR35:

  • If a contractor is inside IR35, HMRC concerns them as an employee for tax purposes.
  • If a contractor is outside IR35, they are considered a contractor, and no further action is necessary.

It is not just the contractor who can suffer from inside IR35 determination. The employer also must pay taxes and NI as if the contractor was a permanent employee. An example of a contractor suffering at the hands of IR35 was the former Sky Sports presenter Dave Clark, who lost an IR35 appeal against HMRC, and subsequently ended up with a £281,000 tax bill.

Maintaining Outside IR35 Status

The changes have affected some of the biggest employers in the UK. Several big brand banks, banned their entire limited company contractors. In some cases, contractors were offered permanent roles. However, the IR35 changes do not automatically mean you need to dismiss your contractors; you just need to be diligent about how they work. These are some ways you can ensure your contractors are outside IR35:

  • Ensure the contract states the word ‘contractor’ and that there are no specific hours detailed. For instance, you might say that the contractor will work pre-determined days and be available when you need them, but you should not state the expected hours.
  • Keep any documentation that shows the contractor informing you that they are taking a holiday. You should not be giving the contractor permission or request that they get holidays approved.
  • Having regular meetings and catch-ups is perfectly fine but telling the contractor what they should do each day or asking for proof of completed work might suggest you treat them as an employee.
  • It is better for this case if the contractor is based at home or primarily based at home. It negates the chances of being inadvertently invited to an office party or team day out. These actions would suggest that the contractor is an employee (to HMRC at least!). Otherwise, have a way of clearly demonstrating that they are a contractor; a different security badge, visitor’s pass, etc.
  • Refer to the contractor as such during meetings with clients and on any formal communication. Some employers prefer that clients believe everyone is an employee of the organisation, but for IR35 purposes, keep it factual.
  • Sometimes the contractor is asked to use your systems and even need to send emails using your email servers. If this happens, make sure that their email address and/or signature clearly shows that they are a contractor and not a permanent member of staff.
  • It is best to stay away from offering a full-time contract to a contractor unless it is for a specific time or project. Instead, you might use them for 2/3 days a week.
  • The contractor should not have access to the perks that employees have—for instance, a gym membership, bonuses, etc.

Think of the contractor as someone who is entirely self-sufficient. You assign them the work needed, but you leave them to get on with it. They communicate with the team, but they do not get involved in any social aspects. You should not have performance management or one-to-ones with the contractor. Instead, you can arrange regular catch-up calls to see how the project is going.

At myCOS, we provide our clients with high quality project management services. We deal with the contractor on your behalf, ensuring they are outside IR35. Contact us today (link to contact us) if you are looking for your next contractor or team.

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