Recruitment | 4 MIN READ
In April 2021 (a year later than planned), the government changed the IR35 off-payroll regulation, with new tax rules coming into play. The changes affect contractors who work through limited companies and the many medium and large businesses who use them. Due to these changes, we've compiled several suggestions to help determine if a contractor sits inside or outside IR35.
Working with specialist contractors post-April 2021 is possible. But to ensure you are safely outside IR35, the nature of the working relationship between your organisation and the contractors will likely need to change.
Lee Colbran, Founder and CMO
A quick recap of the IR35 changes
When the rules changed, organisations became responsible for determining whether or not a contract is inside or outside IR35 rules, as a reminder:
- 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.
Since the change came into effect, IR35 has had a devastating effect on the digital industry, with long-term contractors once commonplace for many organisations no longer able to retain their working status quo. The flexibility for both businesses and contractors has now changed significantly. Even before the new law came into effect, high-profile organisations like HSBC and Morgan Stanley quickly reduced their use of contractors in favour of full-time employment positions.
While the world of contracting has changed, there are options available to businesses and contractors alike to continue this flexible working arrangement.
To help, we've put together nine useful tips to help organisations and contractors determine if it is possible to stay outside IR35 when operating a contractor-client relationship.
Tip #1: Indemnity insurance
Contractors should take out indemnity insurance to mark themselves as contractors rather than employees. The insurance offers protection should a workstream go disastrously wrong.
In a worst-case scenario, liability for a case is 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 a 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. If there is no fixed project deliverable or deadline, the contractor will likely be construed as an equivalent full-time worker and fall inside IR35.
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, these kinds of perks would fall in line with being treated and integrated like employees.
Other perks contractors shouldn’t benefit from include 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 or from the company’s offices. There may be occasions when a contractor is required on-site, such as 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.
Learn more about our IR35 solution for contractors and businesses
See how our three-step approach allows both organisations and contractors to continue enjoying the benefits of flexible working. We first understand the challenge, determine the right solution and then deliver a successful working outcome to enable the safe retention of a contracted workforce outside of IR35.
Tip #5: No access to internal comms channels
Contractors shouldn’t be given company email addresses, and ideally, as non-employees, they shouldn’t be added to an organisation’s primary 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. Once verified, then you need to adhere to them.
Solicitors will lookout 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).
If you are unsure of your contractual arrangement, do have a solicitor take a look.
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 a third party project manager manages the relationship with contractors.
Tip #9: Contracted project teams
Contractors who work as part of a contracted project team would be deemed 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.
There is nothing to stop an organisation from re-engaging the original contracted project team members for a subsequent project. Engaging a third-party, independent project manager to oversee the contractors and the project will clearly indicate that the group sits outside of standard employment and thus outside IR35.
17 Mar 2021
23 Jun 2021