IR35 - one of the worst pieces of tax legislation ever introduced
These are my personal views and do not represent advice.

These draconian rules are designed to stop entrepreneurs setting up small businesses and serving very few customers – on the grounds that an employee pays NIC and PAYE at higher rates than ordinary staff, and the HMRC want their cut of what they see as the "employment total cost" cake.  Maybe £4bn in tax. For IT specialists, Consultants, Interim Executives and many others - this tax legislation is a real problem: It will slow down the speed of appointments - and introduce a wholly unnecessary consideration of tax rules into a business decision. Stupid. But here we are.

In April 2020 the HMRC intend to make employers assess whether the
role which is undertaken is that of an employee: if so, then IR35 rules apply.

If IR35 applies, then broadly speaking the HMRC will insist on 2 things:

  1. The payments to the contractor were made after all taxes – so gross up by about 50% and add NIC, then add interest. This means the invoice of £1k becomes a tax bill of about £1k sometimes more.
  2. The expenses deducted by the contractor (use of house as office, mileage, subsistence + other costs) are not deductible, as the person is an employee. So the individual gets a large tax bill, also with interest.

The whole IR35 initiative is a real problem for small business. It means the small employer may not be able to outsource anything very easily. The overhead of paying a payroll mounts very significantly, very quickly. Taking on new staff often involves a payment to a recruitment agent: For short term and specialist skills needs, permanent staff is not an option. The whole question of supervision and oversight of work is different for permanent staff. The management and administration of a small start-up or business employing quickly becomes very difficult.

What is the benefit of being self-employed? For most people the key aspects are:

  1. Work when you want, for who you want, at a price you are OK with. (So a “When-at-work” test, a “supervision-and-management” test, and a “pricing” test are really required).
  2. The HMRC tests are: Contract details, Worker responsibilities, Who does the actual work (substitution), Who decides work content (contractual changes), Who decides when where and how work is done (deadlines), Who provides assets and materials used, How payment is made (Hourly/Daily, Piece, % sales) , Treatment of Corrective work, Continuation/ Extension arrangements. Whether corporate benefits are paid.

 
 
 
HMRC issued a Employment Status Manual on 7th March 2016, this version updated 27th Feb 2020.
https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm0500

See the pic of all the rule sub-sets they have for this question. Fundamentally, HMRC are able to interpret the rules so broadly as to include anyone in the IR35 net.
You the contractor need to take extreme care not to be trapped within it.
As the HMRC are changing the laws to make it essential that employers assess contractors against the IR35 rules, employers also need to check carefully the contracts they have.

My businesses follow my set of rules which are constructed from personal experience dealing with this sort of question; best advice from other professionals, and information available from detailed research. These rules are:

  1. Employer: Contracts with (small limited company) suppliers of professional skills are laid down as one-off contracts to deliver specified output. This might be the project description. The price is fixed. The deadline is fixed. Location of the work is where-ever the contractor wishes: the employer has a substantial number of hot desks that the contractor may use FOC. Corrections are all at the cost of the supplier. Notified amendments are at the employers cost.
  2. Employer: Contracts for the supply of professional skills with private individuals is not allowed – individuals must be on the payroll.
  3. Employer: Small limited company suppliers may not work for this Employer for more than 50% of their chargeable time in any 18 month period. There must be “cross-cover” (personal substitution) arrangements held by the supplier to ensure that their supplies or deliveries can continue where the individual is ill or indisposed for some reason.
  1. Supplying Company: The main person should be on the payroll of the business. Use the free HMRC payroll service. The amount of money paid can be minimal each month or quarter. There should be a written contract between the company and the individual that sets out the pay, benefits and other terms and conditions.
  2. Supplying Company: Arrangements with other companies for the continuation of supply of products and services in cases where the main person is unable to provide the service, should be written. Occasionally (say once a year) this substitution needs to occur in practice.
  3. Supplying Company: The total revenue generated from a single client should be less than 50% of two year sales total.
  4. Supplying Company: Share ownership should be reviewed so that arrangements achieve the ultimate goal – being the disbursement of income (rather than the avoidance of tax).

It is possible (easy) to approach these rules and to meet them: and to lose sight of the original purpose.
Generally, the purpose of Employers outsourcing to contractors is to have both flexibility and highly available skills for the business. Commonly, contractors are more expensive than employees, even accounting for sick, holiday and corporate benefits.
For Suppliers, the purpose may be to have a preferred lifestyle whilst building a business with a capital value – which itself may be their personal pension plan.

If you have a Personal Service Company then you are at risk of having your income converted to a salary.

As a Supplier there are things that you can do, to avoid this situation. 

  • Join with others who work in similar fields, and operate through a company - put yourself on the payroll; take your earnings in bonus and dividend. Charge your shared company for business expenses wholly and exclusively incurred for the business (as now). 
  • Implement the "Alternate Worker" occasionally.
  • Increase your price to pay for the extra admin.
  • Never work for the same employer or Agent for more than 8 consecutive months.
If you are an Agency finding work for specialists, who work through their Personal Companies:
  • Encourage individuals to group together and provide services through a common company.
  • Put all information in writing - though this may not help (remember Pimlico Plumbers?). 
  • Lobby your MP about this - make sure they know the extra and unnecessary cost you are incurring as a result.
As an Employer of Contractors:
  • Only allow contracts that deliver specific outputs at fixed prices (not time and materials). 
  • Encourage individuals to work together and to expect substitution
  • Check up on contractor accounts - that the revenue you pay is less than 50% of their turnover within any 2 year span.
  • Expect to pay around 10% more for your contractors - just for this administration.



David Lynch MBA FCMA CGMA
March 9th 2020.