IR35 Status Determination

There seems to be a sudden surge in the number of articles related to #IR35. And that is not unexpected. With IR35 tax legislation set to come into power in Private Sector, all everyone on LinkedIn seems to talk about these days is IR35.

It all boils down to the contract. Whether the contract is judged to be inside or outside IR35 would determine whether or not a Contractor would end up paying tax as an employee.

It is the contract that is being scrutinised here and not the contractor. And the status of the contract is determined based on the nature of engagement as well as, the working practices.

And in this case, the person responsible to make that determination is the end client. This means that the risk of wrong determination also lies with the end client.

Think about this from end client's perspective.

You have a number of projects that need to be delivered. You make a rough estimate of the number of bodies you will need. And you approach your HR department who approach various agencies with your requirements.

Do you really want to concentrate on delivering your projects or do you want to get caught up in some legislative nightmare and pay fines to HMRC for getting your contractors' status incorrect?

You have a few options:

1. Hire permanent employees. This is cost effective. However, you need to ensure you will need the additional headcount even after your projects are delivered. You need to have an effective career path for all the people you hire. You need to think about pensions, training, paid holidays, sick leave, etc. etc. Also, hiring permanent employees takes much longer than hiring contractors. There are pros and cons.
2. Hire onsite-offshore resources through consultancies. The cost effectiveness starts to wane a little bit with onsite-offshore resource hiring. Resource quality can often suffer as you won't be in direct control of the hiring process. And that can have a detrimental effect on quality of delivery. Further, offshore resources have to work strange hours that do not match their natural sleep-wake cycle. Offshore resources sometimes lack the same level of motivation as onsite resources. There is a fair amount of attrition with offshore resources and hence, business knowledge can be often lost. Again, there are pros and cons.
3. Hire consultancies to deliver projects. You can hire a consultancy to deliver part or entire project. You share requirements with the consultancy. You negotiate an estimate for both time and cost. You can ask that such engagement be on fixed cost bases or part fixed and part retainer basis. You agree upon project milestones. And as long as these milestones are met, you can release part payments. In case anything is missed, or there are any errors / bugs, the consultancy picks up the cost. The consultancy remains in a fair amount of control regarding the way they carry out the work though. There is risk. But the cost remains under control. As with every other approach, there are pros and cons.
4. Hire contractors. This is where things will need to change. In the past, you would advertise a position for a set of skills and for a specific period of time. Before hiring, you would interview candidates for the position. Basically, it is very much like engaging with an employee for a specific period of time. This will need a rethink if you are to keep the contract outside IR35. You need to think about how you hire a consultancy to deliver a project. And you need to apply the same steps to engaging with a contractor. It will result in some changes to working practices. However, in the long run, you will benefit from hiring high quality, motivated individuals. No need to train, no attrition, no paid holidays or bonus. Yes, there are pros and cons here too.

As long as a client is able to engage with a contractor with the right framework, the contract will stay outside IR35. A client needs to have a "Statement of Work" based contract. As long as this contract has a strictly enforceable substitution clause and no mutuality of obligation, it will remain outside IR35.

There are many third-parties who will not only carry out an independent IR35 status determination, they will also provide insurance against any investigation or lawsuits from HMRC.

Keeping a contract outside IR35 keeps costs lower for client and contractor.

Please get in touch if you wish to find out more.