A Simple Guide to Engaging Contractors

What type of contractor do you need?

In order to determine what type of contractor you need, you will have to think about the exact nature of the work you need completed. You may then decide to engage:

A self-employed consultant (outside of IR35)

This is a contractor, working through their own limited company, who is genuinely in business on their own account. They determine the hours they work, where they work and may undertake an element of financial risk. You would usually engage a self-employed consultant for a specific, time limited, project.

A professional contractor is normally outside of the scope of IR35 and deemed as self-employed for tax purposes.

or

An agency worker (inside IR35)

You may need an agency worker if the assignment is more BAU than project based, they are undertaking the same type of work as other members of staff and you are able to exert a measure of control over how, where and when they complete the work.

An agency worker is within the scope of IR35 and deemed as ‘employed’ for tax purposes (although the Agency Worker Regulations won’t automatically apply).

What is IR35?

IR35 refers to the Inland Revenue Press Release Number 35 and is a piece of tax legislation aimed at combating ‘disguised employment’ and countering tax avoidance. It is specifically targeted at limited company contractors. According to HMRC, ‘disguised employees’ are those workers that HMRC believes would be an employee of the client if they didn’t work through an intermediary such as a limited company.

HMRC want those contractors who they believe to be ‘disguised employees’ taxed in the same way as employees. This may reduce their net income by up-to 25%.

If a contractor tells HMRC that they are self-employed when, in fact, the nature of the particular assignment is more like that of an employee, there may be substantial amounts in back taxes and penalties due.

It is therefore crucial for a contractor to be clear about whether a specific engagement falls within or outside of IR35 before commencing work for the client.

 What are the Agency Workers Regulations (AWR)

The AWR grant temporary workers employment rights in line with their permanent counterparts. Some of these employment rights are available from the first day of the assignment, such as access to shared facilities at the client’s site. Others are provided after a qualifying period of 12 weeks. These include

·        The right to equal pay at the same rate as the equivalent full-time employee

·        Paid holiday leave

·        Maternity benefits

Though the AWR and IR35 are separate legislation, being found inside IR35 is likely to substantially strengthen a contractors AWR claim.

Recent changes

HMRC have introduced significant changes to the rules for determining IR35 in the public sector, which came into force on 6th April 2017. The key changes are:

·        As the contractor’s end client, the public body engaging the contractor is responsible for determining the IR35 status and demonstrating to HMRC that reasonable care has been taken when doing so.

·        HMRC may legitimately chase the public body for payment of outstanding tax and national insurance if an incorrect IR35 judgement is made.

What has this to do with you?

At present the Government have said that there are no immediate plans to widen the scope of this change outside of the public sector. It is, however, widely believed by independent tax experts that HMRC will look to apply the rules to the private sector in the not too distant future.

So what should you be doing now?

At Holmes Search we aim to deal ethically and transparently with both clients and contractors and believe that, even though changes in legislation do not yet apply to the private sector, it is good practice for there to be clear communication between the client hirer and the recruitment agency at the point where a client engages a recruiter to find a contractor.

This will ensure that:

·        We can assist the client, if required, in making a judgement as to whether a particular assignment is within or outside of IR35

·        We are communicating the correct information regarding IR35 status to our candidates

·        The correct TOB are used between all parties (ie our contracts with both the client and contractor match)

·        Any queries regarding the nature of the contract can be discussed and settled prior to drawing up contracts.

How does one determine whether a particular engagement is within or outside of IR35?

The IR35 status of a particular contract should be determined prior to a contractor starting work, in order that the contract is accurately represented to potential candidates and so that correct terms can be issued.

Consequently it is extremely important for the client and recruitment agency to have an open dialogue in order that IR35 status can be determined before the agency begins sourcing candidates. This ensures that all parties are clear on this issue from the start and so minimises risk to the contractor, recruitment agency and end client.

The key tests of employment used by HMRC when determining IR35 status, and those which underpin all UK employment status cases, are:

Control

What degree of control does the client have over what, how, when and where the worker completes the work?

Personal service

Is personal service by the worker required or would the client genuinely accept the worker sending a substitute in their place?

Mutuality of obligation

Mutuality of obligation is a concept where the employer is obliged to offer work, and the worker is obliged to accept it.

Other important factors include the nature of the written contract, whether the contractor is exposed to financial risk, is ‘part and parcel’ of your organisation, is in business in their own right and whether they provide their own equipment.

Holmes Search can help you to stay ahead of the curve by providing guidance and practical assistance with your contracting processes both now and in the future.

As specialists in both sourcing the top level candidates to fill your contracting needs and in the increasingly complex area of contractor legislation, partnering with us will give you the edge that you need to demonstrate, both to your stakeholders and potential workers, that you are clients of choice in the contracting market.