The IR35 'off-payroll' rules will be extended to the private sector from April 2020 onwards, directly affecting a large number of contractors.
Therefore there has never been a more important time to review your business for IR35 and take action if it is affected.
As a Limited Company Contractor or Sole Trader, IR35 is an important consideration for you as it sets out the law relating to tax treatment of your income and also determines your tax position with HMRC. Contractors that fall outside IR35 legislation are entitled to receive payment in the form of dividends. Those who fall inside IR35 are seen as a disguised employee and are only entitled to receive payment on a PAYE basis (albeit through their Limited Company).
Therefore, being caught by IR35 does not prevent you from working through your company, it just means that you need to tax yourself differently with the assignment which is within IR35.
In order to determine if an individual is likely to be caught by IR35, the following series of questions provide a clearer picture as to whether a worker is deemed to be an employee or self-employed. If the majority of answers to the following questions is ‘Yes’, the more likely an individual is to fall inside IR35 and therefore a ‘disguised employee’ of the end client:
- Do you have to do the work yourselves?
- Can someone tell you at any time what to do, where to carry out the work or when and how to do the work?
- Do you have to work a set amount of hours?
- Can someone move you from task to task?
- Do you receive overtime pay or bonus payment?
It is important to reiterate that these questions do not set an individual’s IR35 status in stone but do provide a clearer picture with HMRC as to how an individual works. Cloud Accounting LLP offers unlimited IR35 checks when working through a limited company to make sure you operate compliantly.
If you answered yes to one or more questions, please contact us to see how switching to Cloud Accounting LLP can help you with how to avoid IR35.
THE FOLLOWING TIPS WILL HELP DEMONSTRATE YOU’RE NOT A DISGUISED EMPLOYEE ONSITE AND CAUGHT BY IR35.
1. ENSURE YOUR CONTRACTS ARE ACCURATE AND CONSISTENT
It makes little sense having a contract that states that you will be subject to the control of the client, or that the client’s processes and procedures will apply to you when they don’t in practice. Also, make sure that the contract between the agency and the client does not contain anything that contradicts your contract with your agency.
2. MAKE SURE YOUR CLIENT THINKS THE SAME WAY YOU DO
If your client sees you as an extension of its own workforce, the company is more likely to treat you as an employee. Make sure they know that you are contracted for a specific reason and that they treat you as independent of their organisation throughout your assignment.
3.ENSURE THAT THE CLIENT’S REPRESENTATIVE VIEWS YOU AS AN INDEPENDENT CONSULTANT
This is particularly important where your client representative (i.e. The person who would liaise with HMRC in the event of an IR35 enquiry) is different from the individual who hired your services or worked with you day to day at the outset of the project. If necessary, provide a copy of your contract to the client representative or even a “statement of understanding” which sets out how you intend to work/be treated whilst on an assignment with the client to avoid any misunderstandings.
4.DEMONSTRATE THAT YOU ARE TREATED DIFFERENTLY FROM YOUR CLIENT’S EMPLOYEES
Genuine employees will have certain set working conditions, such as minimum hours, pension arrangements and other benefits, and perhaps subsidised services too. The employer also has a duty to provide work for them, which the employee has an obligation to do – and the employer can stipulate where and how the work is to be carried out. You should be able to show that little if any of this applies to you.
Different pay and benefits will not be enough on their own. Flexible working, assignments for other clients, bring your own equipment, working on a specific package of work for a fixed fee and/or a fixed period are all good ways of showing that you are truly independent.
5. WORKING AS PART OF A TEAM DOES NOT AUTOMATICALLY RENDER YOU A DISGUISED EMPLOYEE OF THE CLIENT
It is essential, however, that you agree to the scope of the work you undertake at the outset of the assignment. Being continually allocated further work by the client, particularly without putting in place additional contracts, could show that you are being treated as an employee. If further work comes up, make sure you put a contract in place before you start working on it.
6. PROVIDE A SUBSTITUTE
Not only does providing a substitute give unequivocal evidence that you are not obliged to offer a personal service, and therefore cannot be a disguised employee, it can also enable you to profit further from the assignment by supplying cheaper labour to perform the services on your behalf. It could also give you the flexibility to work on another contract with a different client.
Having a substitute ready to engage on a project is a strong signal you are running a business. These "employees" can be set up on a zero hours contract. You may want to have arrangements to join a group of fellow experts in your industry niche and make reciprocal zero hours contract arrangements to step into each others project in when necessary - eg if you took ill health, during holidays etc.
7. PROJECT-BASED ASSIGNMENTS ARE SIGNIFICANTLY BETTER THAN PERIOD BASED ONES
Being engaged on a specific project enables you to quote a fixed fee and work flexibly as long as deadlines and project completion dates are met. Being engaged on an ongoing basis may suggest you are only there until the client recruits a permanent employee to do your job. This may indicate that the company is treating you as if you were that individual until someone permanent comes along which can potentially make you a disguised employee.
8. MANAGE YOUR OWN ASSIGNMENTS
As an independent contractor, you should determine the hours required to complete the work. It is important that you take control over managing your assignments and don’t rely on being allocated work. This should also enable you to quote a fixed fee for the project and/or undertake work for other customers alongside your assignments.
9. CALLING YOURSELF A CONTRACTOR AND NOT RECEIVING HOLIDAY OR SICK PAY IS NOT ENOUGH TO PROVE THAT YOU ARE NOT AN EMPLOYEE OF THE CLIENT
Your working practices and other terms of the contract must indicate that you are self-employed. This could involve you showing that you have financial risk in terms of bad debts, rectifying work at your own cost and investing in your company, all good ‘badges of trade’.
10. WORKING FOR MULTIPLE CLIENTS AND INVESTING IN YOUR OWN COMPANY IS A GOOD WAY OF DEMONSTRATING THAT YOU ARE IN BUSINESS OF YOUR OWN ACCOUNT
The more clients you work for, the easier it is to demonstrate that you are self-employed, whereas only having one client as your sole source of income for a lengthy period of time may suggest that you are employed by the end client. To counteract this, pay for your own training and provide as much of your own equipment as possible and pay for them through your business to ensure they are properly accounted for.
HERE ARE SOME PRACTICAL CONSIDERATIONS:
1. Keep client correspondence
If you have emails that clearly state you are not under the control of a manager at the business, but are simply contracted to provide a service, this can be useful too.
2. Don’t name your company after yourself
HMRC knows that a company named after a person may well be just that person, and this fits their profile of a PSC. But if your company has a more ‘business-like’ name, e.g. XYZ Design, it emphasises the fact that your company is distinct from you, and that you could delegate the work to another person if necessary. Employees cannot delegate in this way, so it marks you out as different.
3. Have your own marketing materials
You should be able to demonstrate that you market your contracting services actively. Have a listing on relevant services website, post adverts and print business cards, all of which help to indicate that you are in business on your own account. Never use a business card which includes your client’s branding!
4. Maintain your own office
A well-equipped office, even just in your own home, will strongly imply that your work activities extend well beyond your current client. If you also invest in your own software licences, trade literature and professional memberships, this can help a great deal too.
6. Take out your own business insurance
Having your own business insurance, such as professional indemnity insurance, is a great way of demonstrating that you’re not just an employee.
7. Invest in your professional development
Employees don’t pay for their own training, so if you pay for yours this will be another useful point of difference. Some professions may require you to take continued professional development (CPD) to remain qualified, so by paying for this you’re also reasserting your contractor status.
8. Try to have multiple clients at the same time
It’s not always possible to arrange, but if your time is split fairly evenly between two or more main clients, it’s much harder for HMRC to claim you’re an employee of any of them. However, having a very uneven split (e.g. 90 per cent of your income deriving from one client) may be less convincing.
The more of these strands of evidence you can call upon, the more likely it is that HMRC will accept you are in business on your own account. Having just one or two on their own may not be enough.
Get in touch with us and we can help you calculate how much you might owe if you fall within IR35.
Potentially being classed as a disguised employee can seem like a confusing scenario but it doesn’t have to be.
Over the last 10 years, Cloud Accounting LLP have helped many contractors, freelancers and self-employed professionals, just like you to save time, money and hassle with our comprehensive range of accountancy, financial, legal, insurance and business services.
Cloud Accounting LLP can help you with the responsibility for determining if IR35 applies and assist you with any concerns you may have about potentially disguised employment. Please get in touch to find out more about how we can help you.