Tips on staying outside IR35 for contractors and companies post April 2021
In April 2021 (a year later than planned), the government will implement changes to IR35 regulation. New tax rules will come into play, affecting contractors who work through limited companies, and the medium and large businesses who use them.
When the changes are introduced, the end-client will be responsible for determining whether or not a contract is inside or outside IR35 rules. Inside IR35 means that the contractor is regarded as an employee for tax purposes. Outside IR35 means that they are considered a true contractor, and can continue as they are.
Small businesses, which satisfy certain criteria, are exempt from the changes.
IR35 is already having a devastating effect on the digital industry, as the use of long-term contractors is commonplace for many organisations. The flexibility for both businesses and contractors is now subject to significant change as the new tax year starts. High-profile organisations like HSBC and Morgan Stanley have stated they will no longer use contractors as of later this year, and are offering full-time positions to current contractors.
But there is an alternative to this drastic solution. Here’s what you can put in place to maintain your current contractor-client relationship, and stay outside IR35:
Tip #1: Indemnity insurance
Contractors should take out indemnity insurance to mark themselves as contractors rather than employees. It is designed to protect them in the worst case scenario of a workstream going disastrously wrong.
Liability for any such cases would be pushed to the contractor’s insurance to cover legal costs and any damages awarded to the other side.
Tip #2: Defined projects, not rolling contracts
Projects the contractor is working on should have clear goals and deadlines. Their working relationship with the company should be a series of individual projects rather than a rolling contract.
Tip #3: No access to employee perks
The gym, Christmas party and other employee facilities and events should be out of bounds for contractors, as trivial as it seems, because these kind of perks would fall in line with being treated and integrated like employees.
Other perks contractors shouldn’t benefit from are employer pension contributions, private healthcare, season ticket loans, paid holidays and sick pay.
Tip #4: Flexibility
Contractors should have a high degree of flexibility in terms of when and where they work. They should not be obliged to work during set hours, from the company’s offices. There may be occasions when a contractor is required on site, such as for sprint meetings, and there is no issue here. But whenever the contractor can work remotely, they should be free to work from wherever they choose.
Tip #5: No internal comms channels
Contractors shouldn’t be given company email addresses, and ideally they shouldn’t be added to an organisation’s primary martech and comms tools like Slack and Trello.
Tip #6: Corporate profile
A contractor operating through a limited company should be VAT registered, be paid via invoice, have a business website and company headed stationery and business cards. They should work for multiple clients over the same time period, if possible, and market themselves under a company name rather than their own name.
Tip #7: Solicitor sign-off
HMRC pay less attention to contracts, and more to the nature of the relationship in real life. But checking that your contracts are strong and looked over by a solicitor is still important – then you just need to adhere to them.
Solicitors will look out for things like clauses allowing immediate dismissal, rights of substitution (another worker can replace the contractor and do the same work if required), no mutuality of obligation (an organisation doesn’t have to provide work; a contractor doesn’t have to say yes to work).
Tip #8: Third party project managers
Contractors should not be working alongside employees, and share the same line manager. HMRC could view this as integration into the workforce, and view them as inside IR35.
If possible, make sure your contractors are managed by a third party project manager.
Tip #9: Contracted project teams
Contractors who work as part of a contracted project team would be deemed as outside of IR35, as long as they are only working on set projects rather than on a rolling basis. Once a project is completed, the project team will disband. But, there is nothing to stop an organisation re-engaging the members of the original contracted project team for a subsequent project.
Engaging a third-party, independent project manager to oversee the contractors and the project will give a clear indication that the group sit outside of standard employment, and thus outside IR35.
The last word
Dan Grim, head of in-housing talent acquisition at Fresh Egg, says:
“Working with specialist contractors post-April is possible. But to ensure you are safely outside IR35, the nature of the working relationship between your organisation and the contractors may need to change.
“Fresh Egg is a digital consultancy with 20 years’ experience, and we have been working with clients through statements of work, which among other details, outline project length, fee, deliverables and timescales. Our solution created in partnership, and on the advice of Acumen Business Law, utilises a combination of specialist contractors and our experienced project managers on a per-project basis.”
Fresh Egg has a solution for both contractors and companies who want to ensure they remain outside IR35. To find out how we can help see our dedicated information on IR35.
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